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ING VYSYA
Margin headwinds
In Q3FY11, ING Vysya Bank (VYSB) reported NII of INR 2.45bn, below our estimate of
INR 2.6bn, due higher than expected contraction in NIMs (24bps Q-o-Q). Adjusted for
mutual fund income, margin contraction was low at 13bps. PAT came in at INR 830mn
(up 8% Q-o-Q, 35% Y-o-Y), ahead of our estimate (INR 775mn) on account of higher
than expected other income growth (particularly in forex/derivative, TPD and one-time
gain from sale of investment). VYSB posted a loan book growth of 6% Q-o-Q, while
deposit growth continued to lag (5% Q-o-Q), resulting in 104bps CD ratio expansion to
78.7%. Average CASA grew 4% Q-o-Q.
Margin headwinds
VYSB witnessed higher than expected (24bps Q-o-Q) contraction in NIMs to 3.1%
on account of sharp rise in cost of deposits (up 59bps Q-o-Q). However, adjusted
for income from mutual funds, contraction in margins was lower at 13 bps Q-o-Q
(3.26%). During the quarter, the bank funded its loan book growth through a
combination of (high cost) certificate of deposits (up 19% Q-o-Q) and term
deposits (up 5% Q-o-Q), explaining the increase in cost of deposits; contribution of
certificate of deposits to overall deposits increased by 240bps to 19%. With rates
likely to remain high, we expect pressure on margins to continue.
Significant improvement in asset quality
Headline asset quality numbers continued to show improvement with gross NPAs
declining 3% Q-o-Q to INR 5.8bn (2.7%) and net NPAs declining 16% Q-o-Q to
INR 1.3bn (0.6%). Provision coverage improved sequentially by 370bps to
76.4%. Both recoveries and slippages during the quarter stood at INR 340mn
(9MFY11 slippages at INR 1.8bn) amounting to negligible net slippage.
Management expects slippages to decline further going forward. Credit costs
(one year lag) stood low at ~57bps. Cumulative restructured book stood at
~1.6% of advances.
Outlook and valuation: margin headwinds; downgrade to ‘HOLD’
During the quarter, though the bank saw a sharp spike in cost of funds, asset
quality continued to show improvement, while the business momentum held on.
However, going forward, with CD ratio touching a high of 79%, further loan book
growth shall warrant an expansion in deposits. Given the environment of tight
liquidity and slow deposit mobilization, we believe cost pressures will be more
prevalent and the impact will be disproportionate across banks, with relatively
weaker franchises getting impacted more. Consequently, we believe, VYSB will
continue seeing cost pressures; hence, we are revising our recommendation
from ‘BUY’ to ‘HOLD’ and ‘Sector Underperformer’ on a relative return basis.
The bank is currently trading at 1.5xFY12 book and 10.4x FY12 earnings.
Business momentum continues
In Q3FY11, bank posted a loan book growth of 6% Q-o-Q/23% Y-o-Y (system growth:
~8% Q-o-Q). Growth remained strong in agriculture (6% Q-o-Q), business banking (10%
Q-o-Q) and consumer banking (6% Q-o-Q) segments. Within consumer banking, tractions
remained strong in housing, commercial and auto loans, while bank continued to contract
its personal loan portfolio. After recording strong growth in Q2FY11 (7% Q-o-Q), growth in
corporate segment moderated to 3% Q-o-Q. Management expect advances growth to
remain in-line or better than system. Deposit growth (5% Q-o-Q) lagged the loan book
growth resulting in 104bps expansion in CD ratio to (a high of) 78.7%. Quarter end CASA
ratio contracted 240bps Q-o-Q to 33.5%; however, average CASA grew 4% Q-o-Q.
Strong fees income growth
Other income (ex-treasury) recorded a strong growth of 19% Q-o-Q/28% Y-o-Y.
Tractions remained strong in forex /derivative and third party distribution (a seasonal
phenomenon). One-time gains in other income during the quarter included INR 120mn of
income earned through investment in money market mutual funds and another INR
120mn from sale of investment.
Other highlights:
• The bank has discontinued “teaser rates” from December 2010. Bank made
additional provision of INR 174mn during the quarter of which INR 141mn were on
account of enhanced standard asset provision for teaser home loans in line with RBI
guidelines. Currently, outstanding teaser loan portfolio stands close to INR 9bn.
• ~18% of investment book is in AFS category with <6 month duration.
• Bank intends to maintain CD ratio at close to 79% in tight liquidity conditions.
• Bank has been making accelerated pension/gratuity; however, quarterly
provisioning has been a function of revenues that bank generates which explains
volatility in operating expenses.
• Bank opened 20 branches in current quarter and another 20 in Q1FY11. Going
forward, management intends to take total number of branches to 700 with strong
focus on north and western region.
• Bank’s MFI exposure stood at ~1.5% of advances (indirect exposure at 0.4% of
advances)
Company Description
VYSB was incorporated on March 29, 1930, and is headquartered in Bangalore.
Subsequent to acquisition of stake in the bank by the global financial powerhouse ING
Group in August 2002, the name of the bank was changed from The Vysya Bank to ING
Vysya Bank. The bank has market cap of ~INR 40 bn with balance sheet size of ~INR
367 bn as on December 31, 2010. It has 460 branches, 14 extension counters, and 357
ATMs across India and services ~1.5 mn customers as on December, 09.
Investment Theme
Over the past three years, VYSB has built a strong platform delivering consistent and
improved performance in key ratios reaffirming a turnaround in the bank. The bank has
improved its fee income contribution in line with the leaders, leveraged its balance sheet
at lower cost and hence, improved RoEs to ~13% in FY10. Given the credit crisis and the
subsequent impact on global economies, including India, the bank’s conscious cautious
strategy benefited with lower impact on asset quality (including restructuring). The ING
Group remains committed to India and has participated in the bank’s equity as well as
debt capital issues. We believe the stage is set under the new CEO for the bank to
leverage its turnaround and deliver RoE above ~16% on a long term basis.
Key Risks
Though the bank is making an effort to branch out to other parts of the country and
reduce the share of South India in its business mix, still, a major part of the business will
continue to be driven from South India where competition is higher.
Systemic deterioration in asset quality will post a threat to the bank’s portfolio quality.
Management attrition, particularly among senior management, is a big risk as the
successful turnaround, which began in FY08, depends on VYSB’s ability to hire and retain
senior talent.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
ING VYSYA
Margin headwinds
In Q3FY11, ING Vysya Bank (VYSB) reported NII of INR 2.45bn, below our estimate of
INR 2.6bn, due higher than expected contraction in NIMs (24bps Q-o-Q). Adjusted for
mutual fund income, margin contraction was low at 13bps. PAT came in at INR 830mn
(up 8% Q-o-Q, 35% Y-o-Y), ahead of our estimate (INR 775mn) on account of higher
than expected other income growth (particularly in forex/derivative, TPD and one-time
gain from sale of investment). VYSB posted a loan book growth of 6% Q-o-Q, while
deposit growth continued to lag (5% Q-o-Q), resulting in 104bps CD ratio expansion to
78.7%. Average CASA grew 4% Q-o-Q.
Margin headwinds
VYSB witnessed higher than expected (24bps Q-o-Q) contraction in NIMs to 3.1%
on account of sharp rise in cost of deposits (up 59bps Q-o-Q). However, adjusted
for income from mutual funds, contraction in margins was lower at 13 bps Q-o-Q
(3.26%). During the quarter, the bank funded its loan book growth through a
combination of (high cost) certificate of deposits (up 19% Q-o-Q) and term
deposits (up 5% Q-o-Q), explaining the increase in cost of deposits; contribution of
certificate of deposits to overall deposits increased by 240bps to 19%. With rates
likely to remain high, we expect pressure on margins to continue.
Significant improvement in asset quality
Headline asset quality numbers continued to show improvement with gross NPAs
declining 3% Q-o-Q to INR 5.8bn (2.7%) and net NPAs declining 16% Q-o-Q to
INR 1.3bn (0.6%). Provision coverage improved sequentially by 370bps to
76.4%. Both recoveries and slippages during the quarter stood at INR 340mn
(9MFY11 slippages at INR 1.8bn) amounting to negligible net slippage.
Management expects slippages to decline further going forward. Credit costs
(one year lag) stood low at ~57bps. Cumulative restructured book stood at
~1.6% of advances.
Outlook and valuation: margin headwinds; downgrade to ‘HOLD’
During the quarter, though the bank saw a sharp spike in cost of funds, asset
quality continued to show improvement, while the business momentum held on.
However, going forward, with CD ratio touching a high of 79%, further loan book
growth shall warrant an expansion in deposits. Given the environment of tight
liquidity and slow deposit mobilization, we believe cost pressures will be more
prevalent and the impact will be disproportionate across banks, with relatively
weaker franchises getting impacted more. Consequently, we believe, VYSB will
continue seeing cost pressures; hence, we are revising our recommendation
from ‘BUY’ to ‘HOLD’ and ‘Sector Underperformer’ on a relative return basis.
The bank is currently trading at 1.5xFY12 book and 10.4x FY12 earnings.
Business momentum continues
In Q3FY11, bank posted a loan book growth of 6% Q-o-Q/23% Y-o-Y (system growth:
~8% Q-o-Q). Growth remained strong in agriculture (6% Q-o-Q), business banking (10%
Q-o-Q) and consumer banking (6% Q-o-Q) segments. Within consumer banking, tractions
remained strong in housing, commercial and auto loans, while bank continued to contract
its personal loan portfolio. After recording strong growth in Q2FY11 (7% Q-o-Q), growth in
corporate segment moderated to 3% Q-o-Q. Management expect advances growth to
remain in-line or better than system. Deposit growth (5% Q-o-Q) lagged the loan book
growth resulting in 104bps expansion in CD ratio to (a high of) 78.7%. Quarter end CASA
ratio contracted 240bps Q-o-Q to 33.5%; however, average CASA grew 4% Q-o-Q.
Strong fees income growth
Other income (ex-treasury) recorded a strong growth of 19% Q-o-Q/28% Y-o-Y.
Tractions remained strong in forex /derivative and third party distribution (a seasonal
phenomenon). One-time gains in other income during the quarter included INR 120mn of
income earned through investment in money market mutual funds and another INR
120mn from sale of investment.
Other highlights:
• The bank has discontinued “teaser rates” from December 2010. Bank made
additional provision of INR 174mn during the quarter of which INR 141mn were on
account of enhanced standard asset provision for teaser home loans in line with RBI
guidelines. Currently, outstanding teaser loan portfolio stands close to INR 9bn.
• ~18% of investment book is in AFS category with <6 month duration.
• Bank intends to maintain CD ratio at close to 79% in tight liquidity conditions.
• Bank has been making accelerated pension/gratuity; however, quarterly
provisioning has been a function of revenues that bank generates which explains
volatility in operating expenses.
• Bank opened 20 branches in current quarter and another 20 in Q1FY11. Going
forward, management intends to take total number of branches to 700 with strong
focus on north and western region.
• Bank’s MFI exposure stood at ~1.5% of advances (indirect exposure at 0.4% of
advances)
Company Description
VYSB was incorporated on March 29, 1930, and is headquartered in Bangalore.
Subsequent to acquisition of stake in the bank by the global financial powerhouse ING
Group in August 2002, the name of the bank was changed from The Vysya Bank to ING
Vysya Bank. The bank has market cap of ~INR 40 bn with balance sheet size of ~INR
367 bn as on December 31, 2010. It has 460 branches, 14 extension counters, and 357
ATMs across India and services ~1.5 mn customers as on December, 09.
Investment Theme
Over the past three years, VYSB has built a strong platform delivering consistent and
improved performance in key ratios reaffirming a turnaround in the bank. The bank has
improved its fee income contribution in line with the leaders, leveraged its balance sheet
at lower cost and hence, improved RoEs to ~13% in FY10. Given the credit crisis and the
subsequent impact on global economies, including India, the bank’s conscious cautious
strategy benefited with lower impact on asset quality (including restructuring). The ING
Group remains committed to India and has participated in the bank’s equity as well as
debt capital issues. We believe the stage is set under the new CEO for the bank to
leverage its turnaround and deliver RoE above ~16% on a long term basis.
Key Risks
Though the bank is making an effort to branch out to other parts of the country and
reduce the share of South India in its business mix, still, a major part of the business will
continue to be driven from South India where competition is higher.
Systemic deterioration in asset quality will post a threat to the bank’s portfolio quality.
Management attrition, particularly among senior management, is a big risk as the
successful turnaround, which began in FY08, depends on VYSB’s ability to hire and retain
senior talent.
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