ING Vysya Bank - Share Market India: Stock Market, Equity, NSE

Sector: Financials

Sector view: Neutral

Sensex: 18,464

52 Week h/l (Rs): 405 / 275

Market cap (Rscr) : 5,762

6m Avg vol (‘000Nos): 74

Bloomberg code: VYSB IN

BSE code: 531807

NSE code: INGVYSYABK

FV (Rs): 10

Price as on Sep 14, 2012

Company rating grid

Low High

1 2 3 4 5

Earnings Growth

RoA Progression

B/S Strength

Valuation appeal

Risk

Share price trend

80

100

120

140

Sep‐11 Jan‐12 May‐12 Sep‐12

ING Vysya Bk Sensex

Share holding pattern

0

20

40

60

80

100

Jun‐12 Mar‐12 Dec‐11 Sep‐11

Promoters FIIs Others

Rating: BUY Target: Rs460

CMP: Rs381

Upside: 20.6%

Company ReportSeptember 17, 2012

Research Analyst: Rajiv Mehta

Bhavna Sinyal [email protected]

Initiating Coverage

Being with Certainty

ING Vysya Bank (IVB) is on right track Since 2009, IVB has emerged stronger with a structurally improved balance sheet and regional profile. Bank delivered earnings CAGR of 37% and RoA expansion of 30bps over FY10‐12. In spite of increasingly challenging macro, we believe IVB would continue to perform well due to following

Robust loan profile: Pre‐dominantly a working capital bank in wholesale/SME segments (combined ~75% of book). Well‐diversified credit profile with low exposure to ailing sectors. Largely secured retail book.

Resilient NIM outlook: Portfolio spread has displayed impressive resilience. CASA ratio to improve driven by acceleration in savings growth. Favorable product mix shift and decline in wholesale rates to also support margin.

Huge headroom for opex leverage: Shedding of legacy‐related employee cost and productivity improvement to drive lower‐than‐asset opex growth. Cost/income ratio expected to improve from 59% in FY12 to 54% by FY14.

Strong asset quality: Gross NPL ratio declined sharply over FY10‐12 aided by benign slippages. Restructuring has been minimal (~1.4% of loans). Outlook on slippages/restructuring remains non‐perturbing.

Comfort from high PCR: Counter‐cyclical buffer build over past two years (PCR at 90%); Net NPL/Networth at just 1.3%. Opex leverage benefits to fully transmit to bottomline; earnings to witness a brisk 23% CAGR over FY12‐14.

Secular RoA improvement: Stable margins, decline in cost/income ratio and modest credit cost to underpin continued RoA expansion. Most banks are facing a declining RoA curve. Bank well‐capitalized with Tier‐1 ratio at 10.7%.

Fits in our theme of ‘Buying Certainty’ v/s ‘Buying Valuation’ Investment theme in the banking sector has been unilateral for some time given unnerving macro situation. While high preference for certainty has enriched valuation of few large private banks, IVB has been ignored despite its robust fundamentals. An improving RoA metric differentiates the bank from most others and therefore stock valuation could likely see a sharp re‐rating. Initiate coverage with a BUY rating and 9‐month price target of Rs460.

Financial summary Y/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E

Total operating income 16,615 18,781 21,818 25,688

Yoy growth (%) 14.6 13.0 16.2 17.7

Operating profit (pre‐provisions) 6,355 7,679 9,495 11,763

Net profit 3,187 4,563 5,545 6,911

yoy growth (%) 31.6 43.2 21.5 24.6

EPS (Rs) 26.3 30.4 36.9 46.0

Adj. BVPS (Rs) 200.6 254.6 283.0 317.8

P/E (x) 14.5 12.5 10.3 8.3

P/Adj.BV (x) 1.9 1.5 1.3 1.2

ROE (%) 13.4 14.3 13.5 14.9

ROA (%) 0.9 1.1 1.1 1.1 Source: Company, India Infoline Research

ING Vysya Bank

ING Vysya Bank

2

ING has beaten system credit growth over FY10‐12 Loan mix moved towards wholesale and SME segments

6

12

18

24

30

FY08 FY09 FY10 FY11 FY12

(%)

System ING Vysya Bk

44 42 42 43

22 25 28 31

10 10 76

24 23 23 20

0%

20%

40%

60%

80%

100%

Q1 FY10 Q1 FY11 Q1 FY12 Q1 FY13

Wholesale SME Agri Retail

Source: Company, India Infoline Research

South concentration in branch network has declined Branch mix has moved towards Metro/Urban

41 38 37 35 34 34

4138 37

35 34 34

1015 16

17 19 19

8 9 10 12 13 13

0%

20%

40%

60%

80%

100%

Mar'08 Mar'09 Mar'10 Mar'11 Mar'12 Jun'12

AP Rest of South North & East West

26 28 29 31 30 33

35 35 35 34 34 32

20 19 19 18 18 19

19 18 18 17 17 16

0%

20%

40%

60%

80%

100%

Mar'08 Mar'09 Mar'10 Mar'11 Mar'12 Jun'12

Metro Urban Semi‐urban Rural


IVB has emerged stronger under the new management Under the aegis of Mr.Shailendra Bhandari, MD & CEO (appointed in August 2009), and revamped management team, ING Vysya Bank (IVB) has witnessed a system‐beating loan CAGR of 25% over FY10‐12. More importantly, the brisk asset growth was not driven by chunky project loans but by granular and less risky working capital funding disbursed to wholesale (25% CAGR) and SME (40% CAGR) customers. Growth CAGR in Mortgages was lower at 16% impacted by change in leadership and product mix (towards LAP ‐ loans against property) during FY12. Currently, loan profile is well‐spread between three main segments, Wholesale/Corporate Banking (43%), SME Banking (31%) and Retail Banking (20%).

IVB has significantly reduced its South India concentration over the past few years by opening majority of new branches in other regions. South India’s share in the distribution network has declined from 82% in FY08 to 68% in Q1 FY13. The branch mix has also moved towards metro and urban areas.

System‐beating loan CAGR of 25% over FY10‐12 ‐ mix moved towards wholesale and SME segments

ING Vysya Bank

3

Growth in earnings better than balance sheet in FY10‐12

RoA has seen significant structural improvement

0

10

20

30

40

50

FY09 FY10 FY11 FY12

(%)Total Assets PAT

0.0

0.2

0.4

0.6

0.8

1.0

1.2


(%)


Underpinned by strong focus on asset quality, IVB delivered robust 37% earnings CAGR over FY10‐12 on a much slower balance sheet CAGR of 18%. Such impressive profit performance was despite the bank following a conservative provisioning policy that improved PCR from 60% to 90%. RoA improved by 30bps in the aforesaid period to cross 1%. Apart from lower delinquencies, structural expansion in NIM contributed to the significant improvement in operating metric.

SME lending to remain a core part of loan portfolio Business Banking (SME) has been core to IVB. Several years of experience has made the bank proficient in this segment as manifested in sustenance of high credit quality (GNPL ratio of <1% over the past few years). SME business is closely related to branches as it has been developed based on strong client relationships. Bank predominantly advances working capital loans to stringently appraised SMEs against hard collateral (physical assets such as office, house, gold, etc). Currently, the book is more than 100% covered with comfortable cushion for collateral devaluation. More importantly, all the loan accounts are monitored closely and the bank proactively exits an account showing signs of weakness. IVB’s SME book is also granular (average ticket size small) and de‐risked (well diversified by industry). Over the past three years, there has been a structural shift in the loan portfolio of IVB towards the SME segment; its proportion has increased from 22% in Q1 FY10 to 31% in Q1 FY13. With delinquencies on this book running much lower than expectations, this segment has been the key driver of bank’s profitability. While the bank may turn slightly cautious on SME loans in the light of deteriorating macro, the contribution of this segment is unlikely to come down.

Earnings CAGR of 37% over FY10‐12 vis‐à‐vis 18% balance sheet CAGR

GNPA ratio in SME portfolio is <1% over the past few years

Loans against hard collateral; book well‐diversified

Shift in portfolio mix towards SME segment from 22% in Q1 FY10 to 31% in Q1 FY13

ING Vysya Bank

4

Retail loan mix (end of June’12) Share of LAP in incremental disbursements

80.7%

3.6%

5.6%

10.2%

Mortgages

Personal Loans

Commerial &

Auto

Others

89 86

6552

11 14

3548

0%

20%

40%

60%

80%

100%

FY09 FY10 FY11 FY12

Home loans LAP


Diversified SME book (end of June’12) SME loan growth has been robust

8.1%

11.1%

2.1%

2.5%

3.0%

4.9%

2.7%6.0%7.6%

8.4%

8.6%

35.1%

Trader

Gems & Jewellery

Rental Discounting

Food Processing

Automobile

Iron & steel

Textiles

Contractor

Service Enterprice

Pharmaceuticals

Other Manuf.

Others

30

33

36

39

42

45

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

(%)


Mortgages and gold loans to drive an improved growth in retail portfolio Stability in leadership and continued focus on LAP is expected to drive a reasonably strong growth in mortgages. IVB has been focusing on increasing the LAP component within due to higher yields (by 1‐2% as compared to home loans) and enhanced comfort from rising property prices. LAP’s share in mortgage disbursals has substantially increased from 14% in FY10 to 48% in FY12. Currently, this product forms 20‐22% of the mortgage portfolio. Gold loans is another retail product on which the bank has increased emphasis. It has been re‐engineered and re‐launched and is currently being offered through 180 branches, more focused in the southern region where the market is developed. Monthly AUM acquisition rate has improved sequentially from Rs250‐300mn in Q4 FY12 to Rs300‐350mn in Q1 FY13. Bank expects it to increase to Rs500‐600mn by the end of the current fiscal. Personal loans, presently negligible 0.7% of loan book, would also likely witness healthy growth primarily driven by cross‐selling to existing customers.

LAP component to drive strong growth in mortgages Increased emphasis on gold loan via scale‐up in distribution

ING Vysya Bank

5

Refocus on emerging corporate within wholesale banking Emerging Corporate (EC) is a piece of wholesale banking that deals with companies having turnover up to Rs15bn ie essentially mid market companies. IVB had slowed down underwriting this business since 2008 in the wake of high delinquencies. Now the bank intends to refocus on this business by establishing a specialized team, with renewed business strategy and by being extremely vigilant. Within the wholesale segment, IVB would continue to leverage parent ING’s global relationships to enter new domestic clients and deepen relationships with large Indian corporate. For the overall loan book, we expect 20% CAGR over FY12‐14 with segmental portfolio mix unlikely to witness a major shift. Well‐diversified wholesale book (end of June’12)

21.2%

7.1%

4.6%

4.5%

18.8%

4.0% 4.0%5.6%

4.4%

4.6%

7.9%

13.5%

NBFC

Retail

Food & Agri

Professional Serv

Telecom

Textiles

Chemicals

Construction

Gems & Jewellery

Infra

Manufacturing

Others


CASA ratio has been resilient; expected to improve going forward Unlike most banks, IVB has been successful in sustaining its CASA ratio in the range of 32‐34% over the past nine quarters despite steep increase in short‐term rates and tight system liquidity. Retail bank CASA average has risen from Rs65.8bn in Q4 FY10 to Rs86.2bn in Q1 FY13. Average CASA/Branch has improved from Rs114mn in FY09 to Rs181mn in Q1 FY13. Trend in CA and SA ratios

1316 15 16 16 17 15 17 18

16 16 18 18

16

16 17 17 1819

1818 16

17 1616 15

10

15

20

25

30

35

40

Q1 FY10

Q2 FY10

Q3 FY10

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

(%)Curent Account Savings Account


To refocus on emerging corporate business Expect 20% loan CAGR for the bank over FY12‐14 CASA ratio sustained in narrow range of 32‐34% since FY10

ING Vysya Bank

6

Trend in Retail bank average CASA Trend in New‐to‐Bank (NTB) CASA

50

60

70

80

90

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

(Rs bn)

0

2

4

6

8

10

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

(Rs bn)


New salary account additions has been robust Yoy growth in savings deposits has been muted in recent past

0

10

20

30

40

50

60

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

(No. in 000's)

0

5

10

15

20

25

30

35

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

(%)


The traction in CA portion has been buoyant with its share in total deposits increasing from 15.5% in Q1 FY11 to 18.4% in Q1 FY13. The bank’s strategy of targeting individual promoter accounts of SMEs and penetrating self‐employed, non‐professionals and small businesses has paid‐off. On the other side, savings balance growth has been weak in recent quarters at near 5% yoy, impacted by higher savings rate offered by some private banks and migration of savings balances to term deposits due to attractive rate differential. However, a redeeming factor has been strong addition of salary accounts in the range of 45,000‐60,000 per quarter in the past four quarters. This has not only broadened the base of savings deposits but also represents an opportunity for generating fee income through cross‐selling of various services/products. We believe that reversal of rate cycle (reduction in FD rates by 150‐200bps), cross‐sell in existing salary accounts and sustained robust addition of new salary accounts should improve the savings ratio of the bank in the longer term. This along with continued buoyancy in current account growth would drive a structural improvement in the CASA ratio.

Increase in share of CA from 15.5% in Q1 FY11 to 18.4% in Q1 FY13

SA ratio to improve, aided by robust addition of new salary accounts

ING Vysya Bank

7

CASA ratio to improve in the longer term

13.315.8 16.9 18.2 18.5 18.7

13.7

16.817.7 16.0 16.0 17.3

0

8

16

24

32

40

FY09 FY10 FY11 FY12 FY13E FY14E

(%)Current Account Savings Account


Structural and cyclical factors to keep NIM stable Driven by a sharp increase in C/D ratio, favourable change in loan mix and material improvement in CASA ratio, IVB’s NIM remarkably improved from 2.8% in FY09 to 3.3% in FY12. Even in the recent interest rate up cycle wherein margin of most banks exhibited high volatility, ING’s NIM moved in a relatively narrow band of 3‐3.4% manifesting inherent resilience. Margin outlook for the bank remains sanguine on account of 1) IVB has not announced a base rate cut yet; has only reduced rates for selected products 2) blended loan yield would receive support from shift in product mix towards better yielding products such as gold loans, LAP, personal loans/CV loans, etc 3) steep decline (150‐250bps) in the cost of CDs (~13% of deposits) and wholesale TDs since March should drive funding cost lower in the near term 4) longer term CASA improvement would enhance deposit profile. The bank is likely to sustain NIM in the range of 3.2‐3.3% for FY13/14. NIM has moved in a narrow range of 3‐3.4%

0.8

1.3

1.8

2.3

2.8

3.3

3.8

Q2 FY10

Q3 FY10

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

(%)


NIM improved from 2.8% in FY09 to 3.3% in FY12 Margin outlook remains sanguine; multiple factors to play out

ING Vysya Bank

8

Asset re‐pricing (YoA) has been strong Deposit cost has also risen significantly

8

9

10

11

12

Q1 FY10

Q2 FY10

Q3 FY10

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

(%)

3

4

5

6

7

8

Q1 FY10

Q2 FY10

Q3 FY10

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

(%)


Robust deposit franchise (end of June’12) Wholesale rates have come‐off in recent past

14.9%

18.4%

12.8%

53.9%

TDs

CD

CA

SA

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

Nov

Dec

Jan

Feb

Mar

April

May

June

July

Aug

(%)6m CD 6m CP


Diversified fee income; growth to remain healthy For IVB, the non‐interest income component is high at 30‐35% of total income. The fee income stream of the bank is well‐diversified amongst five key sources viz liabilities, assets, trade finance & cash management, wealth management & advisory and forex. Liabilities driven fees grew by 15% in FY12 and is likely to grow faster this year on account of strong traction in current deposits and salary account additions. Though asset related fees would be positively influenced by the envisaged shift in product mix, it is expected to largely track the overall loan growth. High volatility in currency market and introduction of travel related foreign exchange services would continue to drive impressive growth in forex income. Traction in wealth management & advisory fees has been weak (5% de‐growth in FY12) and is likely to remain so given lackluster capital markets. Trade finance & cash management has been growing at healthy pace of near 20% yoy. We expect overall fee income to grow slightly behind the balance sheet over the next two years.

Except wealth management & advisory, growth outlook in other fee streams resilient Overall fee growth to be slightly slower than balance sheet

ING Vysya Bank

9

Non‐interest income has been a substantial portion of total income

Growth in fee income has been healthy

0

10

20

30

40

50

FY09 FY10 FY11 FY12

(%)

0

6

12

18

24

Q1 FY12 Q2 FY12 Q3 FY12 Q4 FY12 Q1 FY13

(%)


Non‐interest income mix is well‐spread (end of June’12)

6.3%

2.5%

3.4%

20.3%

12.1%

17.5%

19.1%

18.8%

Liability Related

Asset related

Trade Finance & CMS

WM & Advisory Fees

FX & Derivatives

Investment Related

Recoveries

Others


Substantial room for operating leverage; cost/income ratio to improve IVB has been operating at elevated cost/income ratio due to higher staffing levels, employee salaries and other opex/branch. Whereas most banks operate in the range of 40‐50%, IVB had cost/income ratio of 59% in FY12. As compared to other South India based banks that have opex/avg.assets ratio of 1.65‐1.75%, IVB is operating at 2.6%. While this highlights inefficiency in the bank’s operations, it also suggests a huge scope of operating leverage.

Huge scope to improve operating efficiency with C/I ratio at 59%

ING Vysya Bank

10

IVB has one of the highest C/I ratio in the industry Opex/avg.assets ratio significantly higher than other south‐based banks

0

10

20

30

40

50

60

70

IVB

CBOI

KBL

SIB

UBI

DNBK

OBC

ALBK FB

CRPBK

(%)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

ING Vysya Bk Federal Bk South Ind Bk Karnataka Bk

(%)


Revenue/Branch higher than southern peers … but Revenue/Employee lower

35

29

22

19

0

9

18

27

36

45

ING Vysya Bk Federal Bk Karnataka Bk South Ind Bk

(Rs mn)

2.9

2.2 2.2

1.8

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Federal Bk South Ind Bk ING Vysya Bk Karnataka Bk

(Rs mn)


Higher staffing and remuneration levels could be partially attributed to legacy issues in employee base. However, the proportion of unionized staff has declined from 80% to 33% of total employees. Though IVB’s branch productivity as measured by indicators such as business/branch and revenue/branch is better than peers, it is below par in absolute terms given much higher employee cost and other opex per branch. Correspondingly, bank’s per employee productivity metrics is inferior to its southern peers. Management has intensified focus on improving the cost/income ratio by checking the opex growth. In FY12, the ratio improved to 59% from 62% in FY11. The positive trend continued in Q1 FY13 with the ratio declining further to 58%. A calibrated branch expansion, selective relocation and brisk asset growth enhanced branch productivity over the past three years. With significant headroom for further improvement, we expect cost/income ratio to decline to 54% by FY14. Key risk would be a slower than estimated asset growth over the next two years.

Proportion of unionized staff declined from 80% to 33%

C/I ratio improved from 62% in FY11 to 58% in Q1 FY13 Likely to reach 54% by FY14

ING Vysya Bank

11

GNPL ratio has declined sharply over FY10‐12 During the same period, slippage ratio has been low

0.0

0.5

1.0

1.5

2.0

2.5

3.0


(%)

0.5

1.0

1.5

2.0

2.5


(%)


Cost/income ratio to witness material improvement

45

50

55

60

65

70

FY08 FY09 FY10 FY11 FY12 FY13E FY14E

(%)


Asset quality has been resilient; restructuring has been negligible In a not‐so‐favourable macro environment of FY11/12, IVB’s asset quality witnessed substantial improvement with Gross NPL level falling sharply from 3.3% in Q1 FY11 to 2% in Q1 FY13. This was while most mid‐sized banks saw a material increase in their bad loan ratio. Aided by benign delinquency levels (0.5‐1%) and meaningful recoveries/upgradations of forthrightly recognized NPAs during FY09/10, bank’s Gross NPAs actually declined in absolute terms during FY11/12. Even during the past two quarters, wherein the banking industry witnessed a substantial accretion in bad loans, IVB’s Gross NPAs have risen by modest Rs250‐300mn per quarter.

Bulk of the incremental slippages during FY11/12 came from emerging corporate segment. Most of the weak accounts have slipped and substantial delinquencies in future are unlikely as the bank has grown slowly in this segment over FY10‐12. Slippage in the SME/Business Banking segment, which is a large component of bank’s advances, has been negligible over the past couple of years; in stark contrast to most banks. Gross NPL ratio on this book stands at meagre 0.3‐0.4% against typically priced 2‐3%. This dichotomy between the bank and industry vindicates management’s assertion that IVB’s SME book is superior in quality supported by a relatively stringent origination and monitoring (proactive exit strategy).

Significant improvement in GNPA from 3.3% in Q1 FY11 to 2% in Q1 FY13

GNPA ratio in SME is 0.3‐0.4% against typically priced 2‐3% Superior quality SME portfolio backed by stringent origination and monitoring

ING Vysya Bank

12

No increase in GNPL over past nine quarters

2

3

4

5

6

7

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

(Rs bn)


Being largely a working capital bank in the corporate/SME segments, IVB has a small component of term/project loans. Further, bank has no exposure to SEBs and aviation sector while having only marginal exposure to other ailing sectors such as infra/power, textiles and metals & mining. Considering this, it is not surprising that IVB has not witnessed material restructuring activity during FY12 and Q1 FY13. Excluding the microfinance exposure of ~Rs1bn, the bank has restructured only a couple of wholesale banking accounts. Currently, restructured assets stand at miniscule 1.4% of total advances; substantially lower than most mid‐sized banks. Further the near‐term outlook remains sanguine with no material requests in the pipeline. It is important to note that during FY09/10 downturn, IVB acted conservatively by doing little restructuring and recognizing stressed loans as NPAs directly.

IVB does not foresee material asset quality stress in near term with no major accounts in the portfolio showing signs of weakness. Though delinquency ratio could rise (normalize especially in SME portfolio) in ensuing quarters, it would continue to be lower than peers due to the bank’s not‐so‐significant exposure to sectors that are under significant stress. Further, low stock of restructured assets reduces the risk of any negative surprise on slippages. We build in slippage ratio of 1.1‐1.2% for FY13/14 against 0.7% in FY12. Resultantly, we expect Gross NPL ratio to marginally increase to 2.1‐2.2%.

Restructured assets/advances much lower than peers

0

3

6

9

12

15

CBOI

ALBK

OBC

CRPBK

UBI

DNBK FB SIB

IVB

(%)


No exposure to SEBs and aviation sector; marginal exposure to other ailing sectors

Restructured assets stand at miniscule 1.4% of total advances

We build in slippage ratio of 1.1‐1.2% for FY13/14 against 0.7% in FY12

ING Vysya Bank

13

Substantial increase in PCR over past 10 quarters Current PCR is one of the highest in the industry

0

20

40

60

80

100

Q1 FY10

Q2 FY10

Q3 FY10

Q4 FY10

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

(%)

0

20

40

60

80

100

IVB FB

DNBK

ALBK

SIB

OBC

CRPBK

KBL

CBOI

(%)


Unwarranted concern around the bank’s Telecom exposure IVB has a large telecom sector exposure in its wholesale banking segment comprising around 8% of total advances. More importantly, it is highly concentrated in two accounts, Unitech Wireless (Tamil Nadu) and Sistema Shyam Teleservices Ltd (combined 85‐90% of sectoral exposure). With the Supreme Court later cancelling these licenses, the two telcos have been scaling back operations. So while concern around these exposures is natural, it seems to have been exaggerated by the market. Both the telcos have been servicing their interest obligation till now. More importantly, individual exposures are backed by 100% payment guarantee from Telenor (for Uninor) and the parent ING (for Sistema Shyam) as the lending was done based on global relationship of the parent bank. As per recent media articles, the Telenor Group has repaid all Uninor bank loans under its guarantee (implies that IVB would have received its loan funds of ~Rs10bn). Similarly, we also expect the bank to be reimbursed its other telco exposure in case the underlying guarantee gets invoked. High PCR lends comfort in tough times A key highlight of the bank’s performance in the past couple of years has been its conservatism towards NPL provisioning. As highlighted before, IVB’s PCR substantially improved from 60% to 90% in the aforementioned time. At present level, it is one of the highest in the industry. Concomitantly, higher provisioning also drove a sharp decline in net NPL ratio from 1.2% to a negligible 0.2%. As such, bank’s Net NPL/Networth ratio of just 1.3% as on March’12 provides a lot of comfort. Based on the extant asset quality risks, IVB would rank amongst the lowest in the industry. The build counter‐cyclical provisioning buffer would act like a fortress in the medium term, containing the requirement of incremental provisioning even if the bank were to see high delinquencies. We therefore estimate IVB’s credit cost at 50‐60bps in FY13/14. This would ensure that benefits of operating leverage are nearly fully transmitted and earnings CAGR remains robust (estimated 23% over FY12‐14; impressive given challenging outlook).

Telecom exposure in Unitech and Sistema backed by 100% guarantee

Substantial improvement in PCR from 60% to 90% Negligible Net NPL/Networth ratio of 0.2%

Estimate credit cost at 50‐60bps in FY13/14

ING Vysya Bank

14

Net NPL ratio has seen a significant decline Net NPL/Networth ratio negligible for IVB

0.0

0.3

0.6

0.9

1.2

1.5

Q1 FY11

Q2 FY11

Q3 FY11

Q4 FY11

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

(%)

0

5

10

15

20

25

UBI

OBC

KBL

DNBK

CRPBK

ALBK FB SIB

IVB

(%)


RoA to improve further Tier‐1 ratio at comfortable 11%

0.6

0.7

0.8

0.9

1.0

1.1

1.2


(%)

0

2

4

6

8

10

12


(%)


Improvement in RoA to continue; capitalization is sufficient IVB’s RoA has witnessed impressive expansion of 30bps over FY10‐12; crossing the mark of 1%. The improvement could have been larger had the bank not built some counter cyclical provisioning buffer. We expect RoA progression to continue but at a moderate pace over FY12‐14. The incremental expansion would be supported by operating leverage, robust NIMs and measured provisioning. Resultantly, bank’s RoE would improve to 15% by FY14. Beyond FY14, we see further scope for RoA/RoE improvement driven by further decline in cost/income ratio and increase in leverage. Currently, the bank is well‐capitalized with CAR and Tier‐1 ratio of 13.4% and 10.7% respectively. We expect substantial plough backs to keep the bank adequately capitalized over the next two years despite a brisk balance sheet growth.

RoA expanded by 30bps over FY10‐12

Decline in C/I ratio and higher leverage to drive RoA/RoE improvement

ING Vysya Bank

15

Valuation (1‐year rolling P/adj.BV) undemanding … currently near 5‐year mean

0

200

400

600

800

Mar‐08

Jan‐09

Nov‐09

Sep‐10

Jul‐11

May‐12

(Rs)

0.6x

2.5x

2.0x

1.1x

1.6x

‐

0.5

1.0

1.5

2.0

2.5

3.0

Mar‐08

Jan‐09

Nov‐09

Sep‐10

Jul‐11

May‐12

(x)

1yr Fwd P/Adj.BV Mean Fwd P/Adj.BV

Source: Company, India Infoline Research,Bloomberg

IVB and HDFC Bank grew in similar fashion over FY10‐12

Both the banks also have a similarly low asset quality risks

24.6

21.1

32.4

24.6

20.7

37.3

0

8

16

24

32

40

Advances NII Earnings

HDFC Bk ING Vysya Bk

(%)

0.20

1.25

0.19

1.37

0.0

0.3

0.6

0.9

1.2

1.5

NNPA Net NPL/Networth


(%)


IVB fits in our theme of ‘Buying Certainty’ v/s ‘Buying Valuation’ Despite structural RoA improvement and displaying an impressive resilience in asset quality, IVB’s valuation has remained subdued. We believe an improving RoA metric differentiates the bank from most others and therefore stock valuation could see a sharp re‐rating in the medium term. IVB fits in our theme of ‘Buying Certainty’ v/s ‘Buying Valuation’ in the sector as we see increasing challenges both on growth and asset quality front.

Investment comfort is further reinforced by critical similarities IVB shares with HDFC Bank viz. lower exposure to project loans/stressed industries, lesser accretion in stressed assets, resilient NIM/fee income franchise, high PCR/negligible Net NPL ratio, low stock of restructured assets and resilient earnings growth outlook. While high preference for certainty has enriched valuation of few large private banks, IVB has been ignored despite robust fundamentals. Initiate coverage with a BUY rating and 9‐month price objective of Rs460 based on a target multiple of 1.45x FY14 P/adj.BV. IVB is also our Top Pick in mid‐cap banking universe.

Despite structural RoA improvement, valuation remained subdued

IVB shares critical similarities with HDFC Bank

ING Vysya Bank

16

HDFC and IVB also have high PCR Despite these similarities, IVB valuation discount to HDFC Bank is running near historical high

81.0

90.4

50

60

70

80

90

100


(%)

30

40

50

60

70

80

Mar‐08 Mar‐09 Mar‐10 Mar‐11 Mar‐12

(%)


ING Vysya Bank

17

Financials Income statement Y/e 31 Mar (Rs mn) FY11 FY12 FY13E FY14E

Interest income 26,941 38,568 48,220 54,773

Interest expense (16,875) (26,484) (34,171) (38,214)

Net interest income 10,065 12,084 14,049 16,559

Non‐interest income 6,550 6,698 7,769 9,129

Total op income 16,615 18,781 21,818 25,688

Total op expenses (10,260) (11,102) (12,323) (13,925)

Op profit (pre‐prov) 6,355 7,679 9,495 11,763

Prov. for loan losses (1,561) (807) (1,573) (1,889)

Other provisions 45 (330) ‐ ‐

Profit before tax 4,839 6,542 7,921 9,873

Taxes (1,652) (1,979) (2,376) (2,962)

Net profit 3,187 4,563 5,545 6,911

Balance sheet Y/e 31 Mar (Rs mn) FY11 FY12 FY13E FY14ETotal cash & equivalents 25,214 32,306 38,224 36,095

Investments 110,583 127,155 146,228 181,323

Advances 236,021 287,367 341,966 413,779

Total int‐earning assets 371,818 446,827 526,419 631,197

Fixed assets 5,028 5,008 5,258 5,521

Other assets 13,293 18,170 20,896 24,030

Total assets 390,140 470,005 552,573 660,749

Net worth 26,243 39,798 44,380 50,152

Deposits 301,942 351,954 411,786 498,262

Borrowings 41,469 56,965 74,054 88,865

Total int‐bearing liabs 343,412 408,919 485,841 587,127

Non‐int‐bearing liabs 20,485 21,288 22,353 23,470

Total liabilities 363,897 430,207 508,194 610,597 Equity + Total liabilities 390,140 470,005 552,573 660,749

Key ratios Y/e 31 Mar FY11 FY12 FY13E FY14E

Growth matrix (%)

Net interest income 21.3 20.1 16.3 17.9

Total op income 14.6 13.0 16.2 17.7

Op profit (pre‐provision) (1.0) 20.8 23.6 23.9

Net profit 31.6 43.2 21.5 24.6

Advances 27.5 21.8 19.0 21.0

Deposits 16.7 16.6 17.0 21.0

Total assets 15.2 20.5 17.6 19.6

Profitability Ratios (%)

NIM 2.9 3.0 2.9 2.9

Non‐int inc/Total inc 39.4 35.7 35.6 35.5

Return on Avg Equity 13.4 14.3 13.5 14.9

Return on Avg Assets 0.9 1.1 1.09 1.14

Per share ratios (Rs)

EPS 26.3 30.4 36.9 46.0

Adj.BVPS 200.6 254.6 283.0 317.8

DPS 3.0 4.6 5.5 6.5

Other key ratios (%)

Credit/Deposits 78.2 81.6 83.0 83.0

Cost/Income 61.8 59.1 56.5 54.2

CASA 34.6 34.2 34.5 36.0

CAR 12.9 14.0 12.6 11.7

Tier‐I capital 9.4 11.2 10.2 9.4

Gross NPLs/Loans 2.3 1.9 2.1 2.1

Credit Cost 0.7 0.4 0.5 0.5

Net NPLs/Net loans 0.4 0.2 0.3 0.3

Tax rate 34.1 30.2 30.0 30.0

Dividend yield 0.8 1.2 1.4 1.7

Recommendation parameters for fundamental reports:

Buy – Absolute return of over +10%

Market Performer – Absolute return between ‐10% to +10%

Sell – Absolute return below ‐10%

Published in 2012. © India Infoline Ltd 2012 This report is for the personal information of the authorised recipient and is not for public distribution and should not be reproduced or redistributed without prior permission. The information provided in the document is from publicly available data and other sources, which we believe, are reliable. Efforts are made to try and ensure accuracy of data however, India Infoline and/or any of its affiliates and/or employees shall not be liable for loss or damage that may arise from use of this document. India Infoline and/or any of its affiliates and/or employees may or may not hold positions in any of the securities mentioned in the document. The report also includes analysis and views expressed by our research team. The report is purely for information purposes and does not construe to be investment recommendation/advice or an offer or solicitation of an offer to buy/sell any securities. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Investors should not solely rely on the information contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. The recipients of this material should take their own professional advice before acting on this information. India Infoline and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction as a Market Maker, Investment Advisor, etc. to the issuer company or its connected persons. This report is published by IIFL ‘India Private Clients’ research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc and therefore, may at times have, different and contrary views on stocks, sectors and markets. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to local law, regulation or which would subject IIFL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. IIFL, IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel (W), Mumbai 400 013. For Research related queries, write to: Amar Ambani, Head of Research at [email protected] or [email protected] For Sales and Account related information, write to customer care: [email protected] or call on 91‐22 4007 1000

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ING Vysya Bank - Share Market India: Stock Market, Equity, NSE