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ING Vysya: Internal focus

Oct 21, 2003

ING Vysya Bank, one of the largest banks in the southern region, has reported encouraging performance of the September quarter as well as for the 1HFY04. While the bank has reported a marginal fall in topline the bottomline has risen by nearly 40% in the September quarter on a YoY basis. The bank has been able to reduce its interest expenses that have further helped it improve its net interest income as well as margins. Strong growth in other income too has aided the bottomline growth.

(Rs m)2QFY032QFY04Change1HFY031HFY04Change
Income from Operations 2,250 2,210 -1.8% 4,428 4,549 2.7%
Other Income 753 919 22.1% 1,559 1,982 27.1%
Interest Expenses 1,693 1,619 -4.4% 3,507 3,359 -4.2%
Net interest income 557 592 6.2% 921 1,190 29.3%
Other Expenses 746 840 12.6% 1,410 1,597 13.2%
Operating Profit (189) (248)  (490) (407) 
Operating Profit Margin (%)-8.4%-11.2% -11.1%-8.9% 
Provisions and Contingencies 313 35914.9% 467 76062.8%
Profit before Tax 251 311 24.3% 603 815 35.3%
Tax 69 58-16.4% 198 23116.3%
Profit after Tax/(Loss) 182 254 39.7% 404 585 44.6%
Net Profit Margin (%)8.1%11.5% 9.1%12.9% 
No. of Shares (m) 22.6 22.6   22.6 22.6  
Diluted Earnings per share*32.144.9 35.851.7 
P/E Ratio    9.3 
*(annualised)      

While the bank's bottomline performance in the September quarter has been encouraging, the fall in topline is concerning. A fall in interest from investments has been the cause of the fall in topline. However what is encouraging is that the bank's interest income from advances has risen by 17% in the same period. This has been mainly brought about by a 36% rise in advances till date on a YoY basis. The retail lending market has been the main growth driver for the advances growth. The concerning factor however has been the fact that, the bank seems to be facing competitive pressures as seen from the marginal rise in advances from the wholesale segment.

Due to increasing contribution from retail demand as well as savings deposits (23% of total deposits, up from 21% in the same period last year) the cost of deposits have been brought down significantly, thus helping improve net interest income as well as margins. Cost of deposit has been pared to 6.6% (8%). Net interest margin has also improved to 2.5% (2%). There has been a strong improvement in the bank's other income in the September quarter, this has been mainly brought about by a rise in profits from sale of investments. devoid of this (profits from sale of investments) other income growth has been marginal. This is a cause of concern, as once profits from sale of investments dry up, it may severely impact bottomline growth.

The bank in order to reduce its NPAs has been aggressively provisioning in the last few years. This has continued in the current year also. Provisioning has risen in the September quarter as well as the half year period also. While this has helped the bank to reduce its net NPAs to advances ratio (currently 3.3% compared to 3.5% the same period last year), it still continues to be one of the highest among private sector banks.

The stock is currently trading at Rs 480, a P/E ratio of 9x its annualised 1HFY04 earnings. The bank has reported strong results in the September quarter, however lack of growth in the wholesale lending segment as well as high dependence of bottomline on other income are concerning. At an adjusted price to book ratio of 1.9x we believe that the stock may have factored in all the growth prospects of the bank for the future. Further upside from here will be dependent on how the bank manages to reduce its dependence of other income on profit from sale of investments as well as increase its share in the wholesale lending pie. The bank's NPA management startegies also need to be taken in to consideration. for more on the company please refer to our newly initiated research coverage on the same.

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