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ING Vysya Bank: Turnaround of sorts? - Views on News from Equitymaster

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ING Vysya Bank: Turnaround of sorts?
Oct 18, 2006

Performance summary
ING Vysya Bank announced results for the second quarter and half year ended September 2006. Prima facie, the results seem to suggest a turn around of sorts for the bank with the bottomline performance surpassing that of the most efficient players in the sector. The bottomline figure for the said quarter as well as the corresponding quarter of FY06 have been buoyed by one-time extraordinary gains. At the topline level, however, the bank fails to evince any appreciation. The sloppy growth in assets, reliance on profit on sale of assets and callousness towards provisioning, also paint a grim picture.

Rs (m) 1QFY06 1QFY07 Change 1HFY06 1HFY07 Change
Income from operations 3,113 3,389 8.9% 6,004 6,601 9.9%
Other Income 608 855 40.7% 1,019 1,284 26.0%
Interest Expense 1,848 2,015 9.0% 3,719 3,997 7.5%
Net Interest Income 1,265 1,374 8.7% 2,285 2,604 14.0%
Net interest margin (%)       3.6% 3.8%  
Other Expense 1,174 1,363 16.1% 2,248 2,586 15.0%
Provisions and contingencies 389 336 -13.6% 577 540 -6.4%
Profit before tax 309 530 71.4% 479 762 59.1%
Tax 111 116 4.5% 190 199 4.7%
Profit after tax/ (loss) 198 414 108.9% 289 563 94.9%
Net profit margin (%) 6.4% 12.2%   4.8% 8.5%  
No. of shares (m) 90.4 90.7   90.4 90.7  
Diluted earnings per share (Rs)* 8.8 18.3   6.4 12.4  
P/E (x)   7.2     13.7  

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. However, the bank exhibited a very poor operational performance in FY06 and also lagged in terms of asset quality.

What has driven performance in 2QFY07?
Asset growth – No show: While its peers in the private sector banking space are growing their advance books at a breakneck speed bringing the sectoral average to 32% YoY, it is very disappointing to see that ING Vysya Bank’s year-on-year advance growth numbers still lie in single digits. This is, however, understandable given the fact that the bank has had no growth in its deposit base in the first half of this fiscal. It may be recalled that while the bank showed a marked improvement in advance growth in FY05 (31% YoY), almost catching up with its peers in the sector, it failed to show a similar performance in FY06 (13% YoY growth in advances). The same highlights the necessity of the bank to invest in the expansion of franchises and get rid of its southern-region concentration. Also, retail assets continue to occupy a diminutive proportion of the bank’s total advance portfolio (16% in FY06).

The funding gap widens…
(Rs m) 1HFY06 % of total 1HFY07 % of total Change
Advances 93,680   100,410   7.2%
Deposits 129,020   128,800   -0.2%
CASA 32,220 25.0% 39,360 30.6% 22.2%
Term deposits 96,800 75.0% 89,440 69.4% -7.6%
C/D ratio 72.6%   78.0%    

While the cost of deposits increased by 20 basis points over that of 2QFY07, the yield on advances also improved by 20 basis points over the same period. However, the improved composition of low cost deposits enabled the bank to expand its net interest margins by 20 basis points (3.8% in 2QFY07). It may, however, be noted that the bank raised an amount of Rs 780 m as Tier II capital in 2QFY07 (coupon rate of 9.7% per annum and a tenor of 10 years), which may impact its margins going forward.

Extraordinary other income: The non-interest income of the bank grew by merely 13% YoY in 1HFY07. This outlines the fact that the bank saw no improvement in fee-based income. However, the extraordinary profits garnered through sale of stake in Bharat Overseas Bank (post tax profits of Rs 264 m) propped up the other income figure. These profits comprised 31% of the bank’s other income and 64% of its bottomline in 2QFY07. In absence of the same, the bank’s bottomline would have fallen by 24% YoY.

NPA coverage- No prudence: Although the bank’s net NPA to advance ratio has reduced to 1.6% in 2QFY07 (from 2.0% in 2QFY06), it should not be comprehended that the bank can afford to book lower provisioning in the subsequent quarters. In fact, it is alarming to note that the bank has the least NPA coverage amongst its peers and in the wake of increase in the incremental slippages (and therefore rise in gross NPA levels), its delinquency ratios will increase. The fact that the bank continues to cushion its bottomline through lower provisioning is therefore a concern.

What to expect?
The capital adequacy ratio of 11.4%, compared to 11% in 1HFY06, 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 2007). The bank continues to have the highest cost to income ratio of 67% (68% in 2QFY06) in the sector, which is a drag on its bottomline.

At the current price of Rs 163, the stock is trading at 1.8 times our estimated FY08 adjusted book value. Inconsistencies in performance and limited geographical foray continue to stress the bank’s valuations. Also, growth in terms of advance portfolio and fee income leaves a lot to be desired.

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