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ING Vysya: Turning around?
Aug 5, 2005

Performance summary
After a series of disappointing results during FY05, ING Vysya Bank seems to have made a turnaround of sorts by posting a positive bottomline after four consecutive quarters. The same has come on the back of a 17% YoY growth in topline and sustenance of net interest margins. The bank has also made considerable improvement in terms of asset quality and stands adequately capitalised.

Rs (m) 1QFY05 1QFY06 Change
Income from operations 2,461 2,891 17.5%
Other Income 526 411 -21.9%
Interest Expense 1,630 1,872 14.8%
Net Interest Income 831 1,019 22.6%
Other Expense 860 1,074 24.9%
Net interest margin (%) 3.0% 3.0%  
Provisions and contingencies 843 187 -77.8%
Profit before tax (346) 169 148.8%
Tax (146) 77 152.7%
Profit after tax/ (loss) (200) 92 146.0%
Net profit margin (%) -6.9% 3.7%  
No. of shares (m) 22.7 90.5  
Diluted earnings per share (Rs)* (35.2) 4.1  
P/E (x)   35.7  
* (annualised)      

South based private 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 regional exposure in the southern region, it is slowly expanding its presence across the country. ING's participation in the bank's management brought about a turnaround of sorts in the functioning of the bank. However, the bank exhibited a very poor operational performance in FY05 and also lagged in terms of asset quality.

What has driven performance in 1QFY06?
No compromise on margins:  The bank having posted an impressive 36% YoY growth in advances during 1QFY06 seems to be quickly catching up with its peers in term of asset growth. The retail segment (47% of credit book) grew by 45% YoY, while the corporate book posted a growth of 29% YoY. It is pertinent to note that against the earlier trend of the concentration on corporate book, the bank is now focusing on its retail business. Of the retail segment, the bank has increased exposure to consumer and personal loans (38% of retail book up from 34% in 1QFY05) that are high yielding and have lower risk profile. This has helped maintain the NIMs at 3% despite having raised additional capital through rights issue. The same could also be attributed to the fact that the bank has witnessed a sharper fall in cost of deposits (from 8.9% in 1QFY05 to 4.9% in 1QFY06) than in yield on advances (from 12.1% in 1QFY05 to 8.7% in 1QFY06). Low cost deposits however, continue to comprise 28% of the bank’s deposit book, which is lower than the industry average (around 35%). Additional low cost deposits could help improve the bank’s margins going forward.

(Rs m) 1QFY05 % of total 1QFY06 % of total Change
Advances 66,180   90,110   36.2%
Retail 29,270 44.2% 42,490 47.2% 45.2%
Corporate 36,910 55.8% 47,620 52.8% 29.0%
Deposits 100,320   126,060   25.7%
CASA 28,330 28.2% 35,670 28.3% 25.9%
Term 71,990 71.8% 90,390 71.7% 25.6%
C/D ratio 66.0%   71.5%    

Well-hedged ‘other income’:  Although the bank has posted 26% YoY growth in fee income, losses on the treasury portfolio (Rs 24 m in 1QFY06) drained its bottomline. It should however be noted that the bank now has 70% of its investments in the HTM (held to maturity) category and has consistently reduced the duration of investments in both AFS (available for sale) basket and HTM basket. Also, during 1QFY06 the bank sold 14.9% stake in ING Vysya Life Insurance to Gujarat Ambuja Cements Limited (GACL), which resulted in a one-off gain of Rs 229 m.

Lower provisioning:  The net NPA to advance ratio having reduced to 2% in 1QFY06 from 2.3% in 1QFY05, the bank could afford to book lower provisioning during the quarter. This has helped cushion the bank’s bottomline. All said, the bank still features at the bottom of the league in terms of asset quality amongst its peers in the private sector. Also, the bank has had to book amortisation on HTM investments to the tune of Rs 127 m in 1QFY06 against Rs 10 m in 1QFY05, which has been included in provisioning.

What to expect?
With the rights issue (1:3) that concluded in 1QFY06, the bank could raise capital to the tune of Rs 3.1 bn, thus bringing its capital adequacy ratio to 12% from 9% in FY05. Going forward, the bank may find it necessary to raise tier II capital for its funding requirements and to meet the Basel norms. The bank has made the decision to rollout the core banking solution to all branches by FY06, which might call for additional capital requirement and higher operational overheads.

At the current price of Rs 145, the stock is trading 2.8 times its FY05 adjusted book value. With its poor performance in the previous fiscal (FY05), the bank has lagged way behind its peers across valuation parameters. It may be recalled that it was due to this that we had downgraded our projected numbers for the bank in 3QFY05. However, with its asset growth now showing signs of revival, the bank may stand to gain in the longer term, if it can continue to improve its margins and asset quality. If the consistency is visible in the bank’s performance over the next few quarters, we shall incorporate the same in our research report. At the current levels, however, we believe that most of the upsides have been factored into the price.

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