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ING Vysya: Provision costs bloat - Views on News from Equitymaster

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ING Vysya: Provision costs bloat
Jul 30, 2013

ING Vysya Bank declared the results for first quarter of financial year 2013-14 (1QFY14). The bank has reported 24% YoY growth in net interest income for 1QFY14 while net profits have grown by 35% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income grows 24% YoY in 1QFY14 backed by 13% YoY growth in advances.
  • Net interest margin improves to 3.6% in 1QFY14 from 3.4% in 1QFY13.
  • Cost to income ratio comes down to 52% in 1QFY14 from 56% in 1QFY13.
  • Bottomline grows 35% YoY in 1QFY14 despite substantial rise in provisioning costs.
  • Net NPA to advances rise to 0.2% from 0.03% in FY13 (March 2013). The bank has, however, not divulged the restructured assets at the end of June quarter.
  • Capital adequacy ratio (CAR) at 12.6% in June 2013 as against 13.2% in March 2013.

(Rs m) 1QFY13 1QFY14 Change
Interest income 11,714 13,086 11.7%
Interest Expense 8,281 8,832 6.7%
Net Interest Income 3,433 4,254 23.9%
Net interest margin (%) 3.4% 3.6%  
Other Income 1,709 2,444 43.0%
Other Expense 2,967 3,429 15.6%
Provisions and contingencies 267 681 155.1%
Profit before tax 1,908 2,588 35.6%
Tax 607 836 37.7%
Profit after tax/ (loss) 1,301 1,752 34.7%
Net profit margin (%) 11.1% 13.4%  
No. of shares (m)   156.7  
Book value per share (Rs)*   303.6  
P/BV (x)   1.7  
*Book value as on 30th June 2013

What has driven performance in 1QFY14?
  • ING Vysya Bank underperformed most of its peers in private sector and lagged the sector average in terms of loan growth in 1QFY14 as well. Moreover the bank did slip up in retaining the proportion of CASA deposits as well.

    As per the management, the growth in loan book is notwithstanding the repayment in some large corporate accounts during the period. Without these repayments the advance growth would have been significantly higher.

    While the accretion of low cost deposits slowed down, the bank managed to avert the pressure on its net interest margins due to capital support (CAR) despite higher interest costs. The bank's proportion of CASA deposits dropped marginally to 30.2% in 1QFY14 from 33.3% in 1QFY13. As the bank grows its franchise and re-prices its assets, we expect them to bring in more long term stability in ING's margins.

    Modest pace of growth
    (Rs m) 1QFY13 % of total 1QFY14 % of total Change
    Advances 292,534   330,431   13.0%
    Retail 167,037 57.1% 206,800 62.6% 23.8%
    Corporate 125,497 42.9% 123,631 37.4% -1.5%
    Deposits 358,782   409,234   14.1%
    CASA 119,474 33.3% 123,589 30.2% 3.4%
    Term deposits 239,308 66.7% 285,645 69.8% 19.4%
    C/D ratio 81.5%   80.7%    

  • ING Vysya has made a commendable effort in improving its cost efficiency over the years. From having one of the highest cost to income ratio in the sector, ING Vysya has effectively put an effort on this front since FY10. In 1QFY14 too, the cost to income ratio stood at 52% as against 59% in FY12. Also one needs to note the fact that ING's cost to income ratio has now come very close to most large PSU and private sector banks.

  • ING Vysya has in the past few quarters also addressed its concerns with regard to its lower provision coverage. The bank's NPA coverage ratio went up from 83.4% (in FY11) to 98% in FY13. In 1QFY14 it stood at 89%. While the net NPA level has gone up to 0.2% from 0.03% in the past 12 months, the gross NPAs remained stable at 1.75%. The spurt in provisions during 1QFY14 may be indicative of the bank expecting additional slippage in quality. Also, we are concerned about the fact that the bank has not divulged the quantum of restructured assets at the end of June 2013.

  • The proportion of other income to total income has come down from 36% to 32% over the past year and needs improvement to enhance the quality of earnings.

What to expect?

At the current price of Rs 528, the stock is trading at 1.5 times our estimated FY15 adjusted book value. While we are enthused by the bank's emphasis on cost reduction measures and margin sustainability, marginal deterioration in asset quality cannot be ruled out. Going forward, ING Vysya Bank may also have to raise capital which could result in equity dilution. The stock has corrected after our Sell recommendation in April 2013. Our view on the stock remains unchanged.

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