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ING Vysya Bank: Operating costs continue to hurt - Views on News from Equitymaster
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ING Vysya Bank: Operating costs continue to hurt
Aug 18, 2014

ING Vysya Bank declared the results for first quarter of financial year 2014-15 (1QFY15). The bank has reported 8.8% YoY growth in net interest income for 1QFY15 while net profits have de-grown by 18.1% YoY. Here is our analysis of the results.

Performance summary
  • Net interest income grows 8.8% YoY in 1QFY15 backed by 16% YoY growth in advances.
  • Net interest margin falls slightly to 3.4% in 1QFY15.
  • Cost to income ratio moves up to 53% in 1QFY15 from 51% in 1QFY14. This is after adjusting the one-time payment towards VRS (exceptional item).
  • Bottomline falls by 18% YoY in 1QFY15 due to fall in other income and substantial rise in provisioning costs.
  • Net NPA to advances rise to 0.9% from 0.3% in 1QFY14. The bank has, however, not divulged the restructured assets at the end of June quarter.
  • Capital adequacy ratio (CAR) at 15.2% in June 2014 as against 12.6% in June 2013.

(Rs m) 1QFY14 1QFY15 Change
Interest income 13,086 13,996 7.0%
Interest Expense 8,831 9,366 6.1%
Net Interest Income 4,255 4,630 8.8%
Net interest margin (%) 3.6% 3.4%  
Other Income 2,444 2,276 -6.9%
Other Expense 3,429 3,766 9.8%
Provisions and contingencies 681  1,008 48.0%
Profit before tax 2,589  2,132 -17.7%
Tax 836 697 -16.6%
Profit after tax/ (loss) 1,753  1,435 -18.1%
Net profit margin (%) 13.4% 10.3%  
No. of shares (m)    189.7  
Book value per share (Rs)*   376.8  
P/BV (x)   1.6  
*Book value as on 30th June 2014

What has driven performance in 1QFY15?
  • Showing a stark difference between growth in loan book and deposits, ING Vysya Bank started FY15 with focus on corporate loan book. After no growth in deposit book in FY14, ING saw its deposits grow by barely 3.3% in 1QFY15 as it had sufficient funds after capital infusion and borrowings of US$ 385 m against concessional forex swap. Moreover the bank managed to keep the proportion of CASA deposits near 30%. As per the management, the growth in loan book is notwithstanding the repayment in some large corporate accounts during the period. 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) 1QFY14 % of total 1QFY15 % of total Change
    Advances 330,431   381,794   15.5%
    Retail 216,500 65.5% 212,200 55.6% -2.0%
    Corporate 113,931 34.5% 169,594 44.4% 48.9%
    Deposits 409,234   422,688   3.3%
    CASA 123,404 30.2% 126,288 29.9% 2.3%
    Term deposits 285,830 69.8% 296,400 70.1% 3.7%
    C/D ratio 80.7%   90.3%    

  • The improvement in cost efficiency has been muted over the past 12 months and is yet to get closer to the average of private sector banks. In FY14 too, the cost to income ratio stood at 55% as against 56% in FY13. The ratio came to 53% in 1QFY15 from 51% in 1QFY14 after adjusting the one-time payment towards VRS (exceptional item).

  • ING Vysya's NPA coverage has fallen dramatically over past few quarters. The bank's NPA coverage ratio went up from 83.4% (in FY11) to 98% in FY13. In FY14, it stood at 84.2% and the bank has written back some provisions with regard to restructured assets in FY14. At the end of the June 2014 quarter the ratio stood at barely 64.3% confirming our concerns about the asset quality of the bank.

  • The proportion of other income to total income has remained stable at around 30%.

  • ING Vysya Bank's return ratios (post QIP in 2013) have got diluted (8.0% in 1QFY15) and will recover over a longer period of time as the bank's growth and profitability catches up.
What to expect?
At the current price of Rs 612, the stock is trading at 1.6 times our estimated FY16 adjusted book value. While we are enthused by the bank's emphasis on cost reduction measures and margin sustainability, further deterioration in asset quality cannot be ruled out. In addition, the bank will have to work on cost efficiency to achieve improved profitability like that of its peers. We had recommended Sell on the stock in April 2013. We recommend investors to not buy the stock at current levels.

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