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ING Vysya Bank Ltd.
F3Q11: A Mixed Bag
Quick Comment – ING Vysya reported PAT of
Rs830mn: Profit was up 10% QoQ and 37% YoY and
compared with our estimate of Rs806mn. Core
operating profit was up 19% QoQ and 23% YoY.
The key highlights from the results include:
1) NII growth was muted at +12% YoY and -3% QoQ
with margins compressing 24bp QoQ to 3.1% (driven by
rising funding costs).
2) Loan book grew by 23% YoY and 6% QoQ. Deposits
grew by 5% QoQ and 16% YoY.
3) CASA ratio moved lower sequentially by 240bp (partly
driven by run down of one-off CASA balances from
previous quarter).
4) Core fee income growth picked up to 32% YoY from
16% YoY in the previous quarter driven by wealth
management and advisory services and “other”
non-interest income.
5) Asset quality trends continue to improve –
LLP/average loans came off to 0.6% (annualized) from
1.4% in the previous quarter. Coverage ratio improved
to 76% from 73% in the previous quarter.
Maintain EW: Trends in this quarter were mixed with
improvement in fee income/asset quality being offset by
lower margins/CASA ratios. ING Vysya reported ROA
(annualized) of 0.88% and ROE of 13.04% for the
quarter. The stock is trading at 10.6x F2012e earnings
and 1.3x P/BV. At these valuations, we prefer HDFC
Bank, Axis, Yes, and IndusInd among private sector
banks and SBI among state-owned banks.
NII growth +12% YoY / -3% QoQ:
Margins compressed 24bp QoQ/31bp YoY to 3.1%: Margin
compression during the quarter was driven by rising cost of
deposits, which were up 59bp QoQ on a reported basis.
Reported yield on advances moved up, but by a lower amount
(+35bp).
Volume growth was reasonable: Deposits grew 5% QoQ and
16% YoY while advances grew 6% QoQ and 23% YoY. Loan to
deposit ratio moved up to 78.7% from 77.6% in the previous
quarter.
CASA ratios moved lower sequentially: CASA balances
were down 2.4% QoQ with CA balances declining 4.5% QoQ
and SA balances declining 0.5%. In the previous quarter,
management indicated that the company benefited from
one-off large CASA balances. If we adjust for the same, CASA
balances were up 2.2%. CASA/deposits ratio was at 33.5%
(down 240bp QoQ on a reported basis and down 130bp QoQ
adjusted for large one-off balances). CASA/funding (which we
think is a better indicator) also moved lower to 28%.
Fee income growth picked up: Core fee income growth
picked up to 32% YoY from 16% YoY in the previous quarter.
The key driver to the pick up was wealth management &
advisory fee income, which grew 52% YoY (accelerating from
39% YoY in F2Q11. “Other” non-interest income also picked up,
to Rs160mn from Rs20mn in the previous quarter – we do not
have exact details on the nature of the same as yet.
Capital gains and NPL recoveries contribution to PBT came off
sharply from 60% of PBT in F2Q11 to 15% of PBT. In the
previous quarter, INGV benefited from some one-off capital
gains that were used to increase provisions on NPLs (to
improve coverage to 73%). In this quarter, both capital gains
and provisions came off.
Expenses grew 31% YoY but declined 4% QoQ: Employee
expenses were down 9% QoQ (up 31% YoY), driving the fall in
overall expenses. The company has indicated that it has been
providing on an ad hoc basis for additional liability under the
second pension option (although the amount provided this
quarter has not been disclosed).
Asset quality trends continued to improve: Gross NPLs
were down 3% QoQ (+22% YoY). GNPL ratio improved to
2.7% from 2.9% in the previous quarter. Credit costs came off
to 0.6% from 1.4% in the previous quarter (were elevated in
previous quarter as they were building coverage to RBI
requirement of 70%). NPL coverage ratios saw further
improvement this quarter to 76% from 73% as of previous
quarter end
Price Target Computation
We arrive at our price target of Rs400 using a probability-
weighted residual income model, in which we assign
weightings of 70% to the base case, 25% to the bull case, and
5% to the bear case.
We value the stock over three phases – a five-year high-growth
period, a 10-year maturity period, followed by a terminal period.
We use a cost of equity of 14%, assuming a beta of 1.0, a
risk-free rate of 8% (current Indian 10-year government bond
yield), and a market risk premium of 6%.
Risks to Our Price Target
Key downside risks to our price target include slower-than-
expected loan growth, a deeper-than-expected decline in
CASA ratio, greater-than-expected margin compression owing
to a sharp rise in short rates, and a significant deterioration in
asset quality.
Key upside risks to our target are faster-than-expected
improvement in cost efficiency and stronger system-wide loan
growth that aids revenue progression.
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