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ING Vysya Bank: Consistency will matter - Views on News from Equitymaster
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ING Vysya Bank: Consistency will matter
Oct 29, 2005

Performance Summary
ING Vysya Bank, which announced strong results for the second quarter ended September 2005, seems to be picking up pace in its ‘turn-around’ initiative. The bank, after posting losses for a series of quarters during FY05, had shown initial signs of recovery in 1QFY06. Besides a relatively stronger asset growth in 2QFY06 as compared to the previous quarters, the bank also witnessed a marginal expansion in its net interest margins. Higher contribution from non-fund business and better operational efficiency have also compensated for the higher provisions.

Rs (m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Income from operations 2,358 3,113 32.0% 4,819 6,004 24.6%
Other Income (457) 608   69 1,019 1376.8%
Interest Expense 1,431 1,848 29.1% 3,061 3,719 21.5%
Net Interest Income 927 1,265 36.5% 1,758 2,285 30.0%
Net interest margin (%)       3.3% 3.4%  
Other Expense 858 1,174 36.8% 1,718 2,248 30.8%
Provisions and contingencies 86 389 352.3% 930 578 -37.8%
Profit before tax (474) 310   (821) 478  
Tax (183) 112   (329) 189  
Profit after tax/ (loss) (291) 198   (492) 289  
Net profit margin (%)   8.4%     4.8%  
No. of shares (m) 22.6 91.0   22.6 91.0  
Diluted earnings per share (Rs)* (51.5) 8.7   (43.5) 6.4  
P/E (x)         25.5  
* (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 2QFY06?
Asset-led growth: After the lackluster phase witnessed during FY05, the bank has made an appreciable attempt to catapult its asset growth. ING Vysya witnessed a growth of 31% YoY in its advance book during 2QFY06, which is comparable to that of other smaller private banks. While the bank has not divulged details regarding contribution of retail and corporate book to the same, we reckon that that the former has a larger share. Our belief is substantiated by the fact that the management (in a one to one conference call with us) had sited its target of capitalising on the retail credit opportunity. Although ING Vysya Bank continues to increase the disbursals to high and middle level corporate segments (20% higher YoY in FY05), the bank is now following the industry leaders in targeting the high yielding retail and SME assets (46% of advance book in FY05). Of this, going forward, the bank is willing to have a higher exposure to the SME (small and medium enterprise) and consumer financing business thereby increasing the total contribution of retail assets and SME together to 55% of credit book. Further, it should be noted that despite a 10 basis points rise in cost of deposits, the bank was able to expand the net interest margins (NIMs 3.4% in 2QFY06) due to a 45 basis points rise in asset yields.

CD ratio strengthening…
(Rs m) 2QFY05 % of total 2QFY06 % of total Change
Advances 71,576   93,683   30.9%
           
Deposits 104,736   129,021   23.2%
CASA 29,266 27.9% 38,581 29.9% 31.8%
Term deposits 75,470 72.1% 90,440 70.1% 19.8%
Credit deposit ratio 68.3%   72.6%    

Extraordinary ‘other income’: The extraordinary growth in other income of the bank was due sale of its entire 14.9% stake in ING Vysya Life Insurance to Gujarat Ambuja Cements (GACL), which resulted in one-off gain of Rs 229 m. This alone comprised 20% of the bank’s other income in 1HFY06 (75% of net profit). However, the fee income’s contribution to other income also continues to grow, albeit at a slower pace. While fee income grew 12% YoY, we must acknowledge that the contribution of the same to other income remains a high 72% (68% in 2QFY05), one of the highest in the industry. Also, the fact 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 reduces risks on the treasury side.

Lower provisioning aids bottomline: The net NPA to advance ratio having reduced to 1.9% in 2QFY06 from 2.9% in 2QFY05, the bank could afford to book lower provisioning during the quarter. This has helped cushion the bank’s bottomline. However, it must also be noted that the bank no longer is allotting higher provisions to depreciation on investments (as was the case in FY05) and approximately 50% of the provisions were against NPAs in 2QFY06. This will not only accelerate the fall in net NPAs but also improve the bank’s valuations, going forward.

What to expect?
The rights issue (1:3) that concluded in 1QFY06 helped the bank raise capital to the tune of Rs 3.1 bn, thus bringing its capital adequacy ratio to 11% in 1HFY06. 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 May 2006, which might call for additional capital requirement and higher operational overheads.

At the current price of Rs 162, the stock is trading at 1.7 times our estimated FY08 adjusted book value. After having lagged its peers for several quarters (years), the bank seems to have finally got its act together, in terms of restructuring its wholesale and retail lending operations, hedging its treasury portfolio and concentrating its asset quality. A visible improvement in operating efficiency (cost to income ratio reduced to 68% in 1HFY06 from 92% in 1HFY05) also adds to our comfort. Although this suggests that the bank may have got over its worst, inconsistencies in performance and limited geographical foray remain our concerns about the bank. Given this, we believe that accordance of such high valuations till the bank can prove its mettle is unwarranted.

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