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ING Vysya Bank: Some things to cheer about - Views on News from Equitymaster

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ING Vysya Bank: Some things to cheer about

Jul 27, 2007

Performance summary
  • Interest income grows 33% YoY on the back of 23% YoY growth in advances.

  • Net interest margin sustained at 3.2% in 1QFY08.

  • Non-interest income up 93% YoY.

  • Bottomline grows by 71% YoY despite higher provisioning.

  • Net profit margins improve from 4.6% to 5.9%.

Rs (m) 1QFY07 1QFY08 Change
Interest income 3,212 4,285 33.4%
Interest Expense 1,982 2,919 47.3%
Net Interest Income 1,230 1,366 11.1%
Net interest margin (%) 3.2% 3.2%  
Other Income 300 579 93.0%
Other Expense 1,223 1,373 12.3%
Provisions and contingencies 76 159 109.2%
Profit before tax 231 413 78.8%
Tax 83 160 92.8%
Profit after tax/ (loss) 148 253 70.9%
Net profit margin (%) 4.6% 5.9%  
No. of shares (m) 90.7 90.9  
Book value per share (Rs)*   109.2  
*Book value as on 30th June 2007

South based private sector bank
ING Vysya Bank is one of the oldest private sector banks in the country, in which the ING Group of the Netherlands holds a 44% stake. Though the bank has a large exposure in the southern region, it is slowly expanding its presence across the country. ING's participation in the management had earlier brought about a turnaround of sorts in the functioning of the bank.

What has driven performance in 1QFY08?
No deterrence in asset growth: In its 1QFY08 results, ING Vysya Bank continued to differ itself from its peers in more ways than one. While banks across the sector witnessed inferior asset growth, pressure on NIMs and higher operating costs, ING Vysya Bank has differed on each of these parameters. While its peers in the private sector banking space pursued their balance sheet growth targets at a breakneck speed in the last two fiscals, ING Vysya Bank, underperformed the sector average during the period. The same has, however, changed in this quarter with the bank catching up with the average sector growth in advances, in line with most of its peers. Infact, despite the shortage of funds due to lower capital adequacy ratio (CAR) ING Vysya managed its grow through exposure to low risk assets.

Balanced growth…
(Rs m) 1QFY07 % of total 1QFY08 % of total Change
Advances 95,780   118,100   23.3%
Deposits 131,060   164,870   25.8%
CASA 37,630 28.7% 45,050 27.3% 19.7%
Term deposits 93,440 71.3% 119,820 72.7% 28.2%
C/D ratio 73.1%   71.6%    

What is also enthusing is the fact the as against most of its peers, ING Vysya was able to pass on the entire hike in cost of funding to its borrowers, thereby sustaining its net interest margin (NIMs) at 3.2%. While the cost of deposits for ING Vysya has increased by 80 basis points in 1QFY08 itself, the yield on advances have been increased by 120 basis points in this quarter. This has had a benign impact on the bank’s net interest margins (NIMs) that have shown resilience to the cost pressures. Also, unlike most of its peers, the bank has not been very aggressive in terms of garnering high cost term deposits and has instead concentrated on its CASA base (current and savings account) that has grown by an appreciable 20% YoY. The micro financing activities of the bank gained momentum during the year registering a growth of over 150% YoY.

Other income boost: The heavy reliance of the bank’s non-interest income on treasury gains and sale of assets had proven to be very vicious in the past couple of fiscals. However, the same along with higher fee income (the bank has not divulged growth in fee income) seems to have augured well for the bank in this quarter, as the proportion of other income to total income increased to 30% in 1QFY08 from 20% in 1QFY07.

Controlling costs: Having the blemish of bearing one of the highest cost to income ratio in the sector, ING Vysya has effectively put an effort on this front and pared the ratio from 80% in 1QFY07 to 71% in 1QFY08. The same, however, continues to stay well above that of private sector banks and some PSU banks. Employee costs comprised 47% of the bank’s operating costs in 1QFY08.

NPAs – Adopting a cautious approach: Although the bank’s net NPA to advance ratio has reduced to 0.8% in 1QFY08 (from 1.8% in 1QFY07), it should not be comprehended that the bank can afford to book lower provisioning in the subsequent quarters. Having said that, the bank has taken note of its low NPA coverage and in the wake of propensity of incremental slippages due to firmness in interest rates (and therefore rise in gross NPA levels), has increased provisioning in this quarter.

What to expect?
The capital adequacy ratio of 10.8%, compared to 10.9% in 1QFY07, is certainly not sufficient to fuel the bank’s future growth, more so, since it needs to comply itself with Basel II compliances (due March 2009). The total CAR may infact fall short of 9% as is required by Basel II post the compliance therein. Also, the Tier I CAR of 6.6% is just above the minimum required 6%. The bank continues to have the highest cost to income ratio, which is a drag on its bottomline. Also, it needs to revisit its provisioning policies.

At the current price of Rs 248, the stock is trading at 1.8 times our estimated FY10 adjusted book value. While the bank certainly has a long way to go before catching up with its peers and there are inherent limitations that paralyse its growth prospects, it has mended its performance over the past few quarters and this gives investors some reason to cheer about.

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Apr 15, 2015 (Close)


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