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ING Vysya Bank: Efficiency buoys bottomline
Oct 26, 2007

Performance summary
  • Interest income grows 40% YoY on the back of 25% YoY growth in advances.
  • Net interest margin sustained at 3.2% in 1HFY08.

  • Non-interest income up 36% YoY.

  • Cost to income ratio declines from 78% in 2QFY07 to 70% in 2QFY08.

  • Bottomline grows by 11% YoY due to the impact of extraordinary income in 1HFY07. Excluding the extraordinary item, 2QFY08 bottomline has multiplied 5 times over 2QFY07.

  • To raise capital through QIP in FY08.

(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Interest income 3,251 4,535 39.5% 6,334 8,680 37.0%
Interest Expense 2,015 3,153 56.5% 3,997 6,072 51.9%
Net Interest Income 1,236 1,382 11.8% 2,337 2,608 11.6%
Net interest margin (%)       3.2% 3.2%  
Other Income 520 708 36.2% 948 1,406 48.3%
Other Expense 1,362 1,465 7.6% 2,586 2,837 9.7%
Provisions and contingencies 198 (98)   274 61 -77.7%
Profit before tax 196 723 268.9% 425 1,116 162.6%
Extraordinary items 335 -   335 20  
Tax 116 263 126.7% 199 423 112.6%
Profit after tax/ (loss) 415 460 10.8% 561 713 27.1%
Net profit margin (%) 12.8% 10.1%   8.9% 8.2%  
No. of shares (m) 90.7 90.9   90.7 90.9  
Book value per share (Rs)*         117.2  
P/BV (x)         2.3  
*Book value as on 30th September 2007

Evolving into a competent 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. The capital adequacy ratio of the bank stood at 10.5% in 1HFY08. At the end of 1HFY08, the bank had 406 branches 188 ATMs.

What has driven performance in 2QFY08?
Catching up with peers: ING Vysya Bank’s 2QFY08 results, excluding the impact of extraordinary items, are the best in its history. The bank continued in its attempt to catch up with its peers in the private sector. While banks across the sector witnessed inferior asset growth, pressure on NIMs and higher operating costs, ING Vysya Bank has differed on each of these parameters. In this half year, the bank has outperformed the sector growth in advances thus keeping up with the momentum led by its larger peers in the private sector. Infact, despite the shortage of funds due to lower capital adequacy ratio (CAR), ING Vysya managed its growth through exposure to low risk assets.

Balanced growth…
(Rs m) 1HFY07 % of total 1HFY08 % of total Change
Advances 100,410   125,650   25.1%
Deposits 128,800   170,260   32.2%
CASA 39,350 30.6% 49,470 29.1% 25.7%
Term deposits 89,450 69.4% 120,790 70.9% 35.0%
C/D ratio 78.0%   73.8%    

What is also enthusing is the fact that as against most of its peers, ING Vysya was able to pass on the entire hike in cost of funding to its borrowers, thereby sustaining its net interest margin (NIMs) at 3.2%. While its cost of deposits has increased by 80 basis points in 1HFY08 itself, the yield on advances has increased by 120 basis points. This has had a benign impact on the bank’s NIMs. Also, unlike most of its peers, the bank has not been very aggressive in terms of garnering high cost term deposits and has instead concentrated on its CASA base (current and savings account) that has grown by an appreciable 26% YoY. The micro financing activities of the bank gained momentum during the year registering a growth of over 150% YoY.

Other income boost: The heavy reliance of the bank’s non-interest income on treasury gains and sale of assets had proven to be very vicious in the past couple of fiscals. However, the same along with higher fee income (the bank has not divulged growth in fee income) seems to have augured well for the bank in this quarter, as the proportion of other income to total income increased to 29% in 1HFY08 from 35% in 1HFY07.

Controlling costs: Having the blemish of bearing one of the highest cost to income ratio in the sector, ING Vysya has effectively put an effort on this front and pared the ratio from 78% in 2QFY07 to 70% in 2QFY08. This is despite the fact that the bank opened 13 new branches and 61 new ATMs during the last year. The same, however, continues to stay well above that of private sector banks and some PSU banks. Employee costs comprised 47% of the bank’s operating costs in 2QFY08. The bank has also started providing for AS-15 on a pro-rata basis.

Re-classification pares provisioning: Complying with the RBI’s July 2007 guideline of reclassifying amortisation of premia on investments in the Held to Maturity (HTM) category, the bank has reclassified income to the tune of Rs 276 m in 1HFY08, thus reducing the provision expenses. However, although the bank’s net NPA to advance ratio has reduced to 0.8% in 1HFY08 (from 1.8% in 1HFY07), it should not be comprehended that the bank can afford to book lower provisioning in the subsequent quarters. Having said that, the bank has taken note of its low NPA coverage and in the wake of propensity of incremental slippages due to firmness in interest rates (and therefore rise in gross NPA levels), has increased provisioning in this quarter.

Capital raising on the cards: The capital adequacy ratio of 10.5% in 1HFY08 is certainly not sufficient to fuel ING Vysya Bank’s future growth, more so since it needs to comply itself with Basel II compliances (due March 2009). The bank has, therefore, recently decided to raise capital through issue of up to 7.5 m shares by way of Qualified Institutional Placement (QIP) and 6.1 m shares by way of preferential allotment to ING Mauritius Holdings and ING Mauritius Investment. We expect that post capital raising, the bank's 'return on equity' (8.1% in FY07) will remain stagnant in FY08 but improve to 15% levels by FY10, in line with its peers in the private sector. The enhanced book value will entail a dilution of 15% of the current share capital base.

What to expect?
At the current price of Rs 270, the stock is trading at 1.7 times our estimated FY10 adjusted book value. The bank continues to have the highest cost to income ratio, which is a drag on its bottomline. Also, it needs to revisit its provisioning policies. While the bank certainly has a long way to go before catching up with its peers and there are inherent limitations that paralyse its growth prospects, it has mended its performance over the past few quarters and this gives investors some reason to cheer about. Having said that, given the steep valuations, we maintain our cautious view on the stock.

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