ING Vysya Bank

Investors with a two-three year horizon and a moderate risk appetite can consider buying the ING Vysya Bank stock. The bank is an old generation private sector one in which ING, a global financial major, owns 43.72 per cent stake. While the stock has under-performed on a year-to-date basis, it may have scope to provide healthy capital appreciation, given that it has consistently improved key operational parameters though they are low compared with peers. But the progress that the bank has made is impressive.



At the current market price of Rs 308, the stock trades at an earnings multiple of 10.6 and at 1.50 times adjusted book value, based on the likely FY-11 numbers.

This places the bank at a discount to new private sector banks and at a premium to old private banks such as Federal Bank, South Indian Bank.

The net interest margins have improved steadily over the last three years and the cost-income ratio fell significantly as the bank's net profits grew by a compounded annual rate of 39 per cent over 2007-10. The net profits went up from Rs 88 crore in 2006-07 to Rs 242 crore in 2009-10.

Over the last couple of years, the bank has chosen prudence over growth and cleaned up the balance-sheet, which may limit asset quality deterioration, going forward. The bank also improved its low-cost deposit proportion, reducing the interest costs.

ING Vysya's loan book is all set to grow at a strong rate as it has a strong presence in the high-yielding retail segment. It has also restarted certain products (such as loans to commercial vehicles and other automobiles) which it discontinued in early FY-10.

The company, apart from having strong promoter backing which enables it to strengthen its capital base from time to time, has strong fee income proportion and under-tapped branch network predominantly in high-growth South Indian states. The bank has an other income (fee income) to net revenues proportion of 43 per cent.

Margins to stabilise

The net interest margin (NIM) of the bank was 3.21 per cent for FY10, up from 2.84 per cent in the preceding year. CASA (Current Account Savings Account) focus helped the bank improve the low-cost deposit proportion to 32.6 per cent, a 5.6 percentage points jump over the preceding year helping it to bring down the interest cost.

Higher CASA deposits and re-pricing of deposits at a lower rate led to the fall in cost of funds, thereby improving the margins. The NIM is set to stabilise at the levels above 3 per cent as the margin accretion from improving credit-deposit ratio (currently 71 per cent) is set to be limited by higher expense due to new interest calculation norms for savings bank deposits and a likely hike in cash reserve ratio.

The deposit maturity pattern of the bank is skewed towards the short-term even as the bulk of its loans are long-term. This mismatch may work well for ING Vysya as it allows the bank to reduce the interest rate risk on the deposit side, while passing on the hikes to borrowers due to floating rate nature of their loans.

The bank's investment book is also less prone to the interest rate movements as the non-HTM (held-to-maturity) investments are biased towards the short-term maturities. Given this backdrop, ING Vysya is positioned well for interest rate volatility. We expect ING Vysya Bank to improve the core return on equity of 9.4 per cent as of March 2010 to around 12.5 per cent in March 2011.

Well-capitalised

ING Vysya Bank is strongly capitalised after the capital raising done last fiscal. The bank raised Rs 415 crore through qualified institutional placement and preferential allotment to the parent, ING Netherlands.

Post this, the equity dilution of 17 per cent was compensated by a strong earnings growth of 28 per cent, preventing any earnings dilution for investors. ING Netherlands has been supporting the bank from time-to-time in terms of subscribing to equity and other capital raising issuances such as Tier-1 and Tier-II bonds.

High capital adequacy, coupled with strong internal accruals and other available capital raising instruments, will allow the bank maintain capital adequacy over 12 per cent for the next two years even with a 25 per cent advances growth. Another capital infusion is expected only beyond this period.

Business

The advances of the bank grew by a annual rate of 15 per cent during 2007-10. Over the years, the high-yielding consumer banking proportion has gone up. The current consumer banking proportion stood at 58 per cent as against 55 per cent in 2007.

Even as the cost-income ratio (a parameter for judging operating efficiency) fell from 69 per cent to 55 per cent, the cost-income of the bank is still high and could continue to be at these levels as the branch expansion and recruitment continue at a rapid pace. ING Vysya has been a laggard in branch expansion. In addition, business per branch and profit per branch is still lower than peers.

Asset quality concerns

Asset quality of the bank witnessed steep deterioration over the last two years. The gross NPA ratio rose from 1.38 per cent in March 2008 to 2.96 per cent in March 2010 due to high proportion of retail and SME loans. The restructured assets contributed to 16 per cent of the incremental NPAs over the one year ending March 2010.

The RBI mandated banks to increase their provision coverage to 70 per cent by September 2010.

ING Vysya Bank, adhering to the deadline, increased the provision coverage of the bank from 36 per cent in FY-09 to 60 per cent in FY-10. However, the bank would need almost all the profits earned in a quarter to improve the coverage to 70 per cent by September 2010.

The absolute provisions of the bank went up by 72 per cent this year. The provision this year may get lower as the NPA ratio moderates. The cumulative proportion of NPAs and restructured assets is still low compared with many peers.

via BL