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ING Vysya Bank: Capital risks addressed - Views on News from Equitymaster
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ING Vysya Bank: Capital risks addressed
Nov 7, 2008

Performance summary
  • Interest income grows 25% YoY in 1HFY09 on the back of 26% YoY growth in advances.

  • Net interest margin remains stable at 2.7% in 1HFY09 due to higher proportion of CASA.

  • Cost to income ratio declines from 70% to 65% in the last 12 months.

  • Bottomline grows 23% YoY in 1HFY09 despite a nine-fold increase in provisioning costs

  • One of the lowest capital adequacy ratios of 10.5% at the end of 1HFY09. ING Bank N.V. to infuse capital by way of perpetual bonds in foreign currency.



(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Interest income 4,076 5,316 30.4% 8,091 10,100 24.8%
Interest Expense 2,985 3,750 25.6% 5,962 6,954 16.6%
Net Interest Income 1,091 1,566 43.5% 2,129 3,146 47.8%
Net interest margin (%)       2.7% 2.7%  
Other Income 981 1,235 25.9% 1,839 2,514 36.7%
Other Expense 1,447 1,885 30.3% 2,791 3,697 32.5%
Provisions and contingencies (97) 216 -322.7% 61 631 934.4%
Profit before tax 722 700 -3.0% 1,116 1,332 19.4%
Extraordinary items - -   20 -  
Tax 263 230 -12.5% 423 456 7.8%
Profit after tax/ (loss) 459 470 2.4% 713 876 22.9%
Net profit margin (%) 11.3% 8.8%   8.8% 8.7%  
No. of shares (m)       91.0 102.5 102.8
Book value per share (Rs)*         158.5  
P/BV (x)         0.9  
*Book value as on 30th September 2008

What has driven performance in 2QFY09?
  • Despite severe shortage of capital and slower accretion of low cost deposits, ING Vysya Bank managed to grow its advance book by 26% in 1HFY09. While the bank has not divulged the breakup of advances into corporate and retail, a large share of its advances continue to remain concentrated in corporate and SME assets. The bank also managed to marginally improve the proportion of CASA deposits from 27% in 1HFY08 to 29% in 1HFY09, which kept its net interest margin (NIMs) stable at to 2.7% (as was in 1HFY08).

    Focusing on cost

    (Rs m) 1HFY08 % of total 1HFY09 % of total Change
    Advances 125,650   158,660   26.3%
    Deposits 170,250   208,970   22.7%
    CASA 49,470 27.3% 60,800 29.7% 22.9%
    Term deposits 120,780 70.9% 148,170 70.9% 22.7%
    C/D ratio 73.8%   75.9%    

  • 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 70% in 2QFY08 to 65% in 2QFY09. This is despite the fact that the bank opened 18 new branches and 30 new ATMs during the last quarter. The same, however, continues to stay well above that of private sector banks and some PSU banks. Employee costs comprised 49% of the bank’s operating costs in 1HFY09. The bank has also started providing for AS-15 on a pro-rata basis. ING Vysya has recently got RBI licences to open 56 new branches and 100 ATMs.

  • The bank also managed to improve its asset quality both in absolute and percentage terms and maintained the net NPA level at 0.8% of advances (as was the case in 1HFY08). Its gross NPAs came down from 2.1% of advances to 1.4% of advances.

  • The concerns with regard to the shortage of capital for the bank were primarily based on the fact that the parent entity (ING Bank NV) was itself seeking financial bailout from the Netherlands government. Also, the RBI in recent times has been very strict with banks failing to stay above the minimum CAR (9%) requirement and ING Vysya is close to breaching the same. The concerns, however, have been recently addressed as ING Bank N.V. has decided to invest in ING Vysya Bank, by way of perpetual bonds in foreign currency for an amount equivalent to Rs 945 m. This will also have a call option at the end of 10 years. The same will shore up ING Vysya Bank CAR, enabling the bank to sustain its growth in the medium term, while at the same time it will restrict ING’s stake in the bank at the current 44%.

What to expect?
At the current price of Rs 255, the stock is trading at 0.8 times our estimated FY11 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, it has mended its ways over the past few quarters. We had recommended a Sell in October 2007, since which it has corrected 44%. At the current valuations and with improved visibility into the future of the bank, the stock appears relatively attractive than in the past, for the longer term.

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