ING Vysya Bank: Does not live up to its lion image
The bank in a nutshell Judging by the income and expenditure figures of ING Vysya Bank, it appears that the banking industry earns its place under the sun through a fairly complex mix of income streams. These streams emanate from bank loans, bill discounting, income from a string of investments, and, from assorted receipts grouped under 'other income’. (For segment results disclosure though, the bank classifies its income under 3 heads-Treasury, Wholesale Banking and Retail Banking). Not that ING is a flag bearer of the banking industry by any yardstick, but its performance is still a pointer to the economics of the industry.
The bank has difficulty rustling up a deposit base for starters. During the year deposits edged up a mere 4% to Rs 25.9 bn from Rs 24.9 bn, which is a laugh. But then it had only 482 branches at year end to drum up the deposits. Its branch strength is growing at a snail’s pace too. Ten years ago in FY01 it made do with 381 branches. In between in FY05 this figure even dipped to 370 branches. Compared to the gargantuan number of branches that the PSU banks make do with, this is a small number. For reasons known only to it, the bank may well have deliberately limited the growth of both branches and deposits.
A slow mover
It is a slow mover on all counts over the decade. But very creditably it was the slowest mover on the employee roll call front, and on the branch count front. Consequently, the yardsticks measured by employee strength and by branch strength grew impressively. Employee strength moved up very marginally from 5,906 in FY01 to 6,249 in FY10, having dipped to 4,959 in the interim. (Employees are however a very high wage island in the banking industry. The remuneration per employee averaged Rs 686,000 during the year against Rs 629,000 in the preceding year. Employee costs accounted for 53% of all 'operating’ expenses' of Rs 7.7 bn). The average deposits per branch, over the decade, increased from Rs 213 m to Rs 536 m. Similarly, the average deposits per employee grew from Rs 13.7 m to Rs 41.3 m, while the advances per employee grew more quickly, from Rs 7.3 m to Rs 30 m. In fact, the ratio of advances as a percentage of deposits also went on an unsettling 'topsy turvy’ ride over the ten years. But this gap also narrowed from 53% in FY01, rose to a high of 78% in FY07, and settled at 72% in FY10.
More pertinently, and as compared to the preceding year, the bank seems to have sold itself awfully short on the growth front. A remarkably smaller increase in deposits for one (Rs 10 bn against Rs 44 bn), a decrease in other assets of Rs 5 bn against a growth of Rs 9 bn, and consequently, a smaller growth in advances (Rs 19 bn against Rs 22 bn) and a precipitous drop in additional investments (Rs 763 m against Rs 43 bn). In other words, as stated earlier, the bank simply downsized growth.
Income and profit factor
In any event, the meager growth in the rate of deposit collection that it garnered had no negative fallout on its bottom-line. As a matter of fact the net profit before depreciation and tax jumped 24% to Rs 4.1 bn from Rs 3.3 bn in the preceding year. This was due to a significant factor. A remarkable turnaround in the working of 2 of its 3 profit centers, though the total revenues that the bank recorded was up by only a mite. Wholesale Banking and Retail Banking brought in 76% of all revenues. These two profit centers upped their working and realized gross margins in excess of 30% each, against margins of 18% and 12% in the preceding year. This is indeed befuddling as the bank simultaneously accelerated the level of provisioning by a massive 108% to Rs 2.7 bn from Rs 1.3 bn previously. It becomes even more bizarre when you consider that total advances rose a mere 11% during the year.
Looking at it another way, the manner in which ING’s income is structured it would be out of pocket if it did not generate sufficient receipts classified under 'Other Income’. The main income that it generates, and which is classified as 'Interest Income’ (it accounts for 78% of all income), includes interest on bank loans, bill discounting, the income that it realizes on its investments in G-Secs, income from other approved securities, shares and debentures and, bonds and mutual funds etc. These combined income streams are just not enough to bring home the bacon.
Other income which tossed in Rs 6.2 bn in to the kitty, and which accounts for 22% of all income is the game changer. This other income is generated under 8 sub-heads, including lease income. (But the way in which the lease income is accounted for, it makes no sense to the uninitiated. In any case this line of activity appears to be of the zero-sum variety). Just four items on the other income list accounts for almost all of the receipts under 'other income'. These include 'commission, exchange, and brokerage', profit derived on 'derivatives trading', 'miscellaneous income' and, the profit on sale of 'investments’. Of the first three items mentioned earlier, two are in a sense not quite directly related to the main operations of the bank. The first item, derivatives trading and income from forex trades, can as a matter of fact lead to a whopping loss. In fact that is precisely what appears to have happened. Treasury operations, the third axis of the profit centre, which brought in 24% of the gross receipts, actually recorded a loss during the year against a profit in the preceding year. The second item, miscellaneous income, cannot be guessed with any level of accuracy. The third item, profit on investments, can however be timed in a manner of speaking, and it provides the judicious back up support. Gilt prices oscillate on interest rate movements, and marked to maturity yields.
The asset and income structure
So it is 'other income’ which enables the bank to ink the bottom-line in black. And this is also a direct consequence of the manner in which the deposits are structured, the returns that the bank generates on its investments, and the type of lending that banks are required to indulge in. A little over 67% of all deposits of Rs 258 bn are held as term deposits. A further 17% is held as savings bank deposits, with the balance 16% as demand deposits. Banks get to maximize returns on lending money held as demand deposits, as they do not have to pay any interest on money held under this head. Demand deposits are also normally held by businesses, which in turn have borrowed from the bank and are therefore constrained to open such an account. Conversely, banks get to generate the least returns on time deposits as they pay the highest interest rates on time deposits.
Secondly, priority sector lending is one area where the rate of interest charged is often below the economic rate of return. Besides, a part of their total lending has to be targeted at this priority sector. That is to say over 37% of the total advances of Rs 185 bn that ING had in its books at year end were targeted at the priority sector. Other lending accounted for the balance funds doled out.
The statutory factor
Banks are required under statute to hold a part of their deposits as investments, merely as an insurance against bank default. Banks are also required under law to hold a part of their deposits with the RBI as cash reserve ratio (CRR), again as an insurance cover, on which they get next to nothing as interest. The investments that banks hold are largely required to be made in gilt edged securities, or in quasi gilt edged securities. But many banks hold more funds in such securities than are required to do under law, as a matter of prudence. ING at year end had total investments of Rs 105 bn, which works out to 40% of its deposit base. Of this, a little over 78% or Rs 82 bn was held in G-Secs, with another 20% or Rs 21 bn being held in mutual funds, RIDF (Rural Infrastructure Development Fund) deposits, and such like. That is to say its holdings in G-Secs are roughly equal to 32% of its deposit base, based on the valuation of its G-Secs portfolio. This percentage holding is above the statutorily prescribed limit.
The total amount held in RIDF deposits is not separately known, but banks have to contribute to this central government sponsored scheme, administered by NABARD for rural infrastructure development projects. Banks get an interest of around 6%, or some such, on such deposits. Thus the vast bulk of the moneys held as investments are tied to fixed interest rate returns. From the available data ING may have generated a return of not more than a mere 4.9% interest on all its investments combined. This appears to be a totally ridiculous rate of return by any reckoning! And, this is also where the timing of the sale of its gilt edged investments comes in handy. The timing of the transaction is crucial to generating maximum capital gains.
Lacking in spunk
Its investments philosophy is very conservative indeed and its investments in risk capital market instruments appear to be zilch. Why this is so will be interesting to know. The bank needs to increase the income yields on its portfolio from the present miserable returns that it appears to be generating. Besides, there appears to be no spunk whatsoever in its working. This is definitely not the share to park your risk denominated money - at least not till it shows some signs of life.
Please Note That I Am Not A Shareholder Of This Company
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.