ING VYSYA Bank (VYSB IN, INR 366, Buy)
We recently met the top management of ING VYSYA Bank (VYSB). Management sounded confident of maintaining benign asset quality metrics; however it expects the current macro challenges to limit the cost-to-income improvement. Maintain BUY.
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NPLs: Confident in uncertain times
Management confidently articulated its ability to further deliver on robust asset quality despite 30% SME exposure (with GNPL in the segment around 0.3% and NNPL in the negative). VYSB attributes the same to: (i) better underwriting; (ii) adequate collateral cover (including property); (iii) consumption-driven growth; (iv) working capital focus; and (v) sole banker in most cases. Further, exposure to mid-corporate segment (weak point in previous downturn of FY08) has come off from 50% to 30% of wholesale banking, which coupled with the bank’s marginal exposure to stressed sectors should contribute to robust asset quality. Moreover, provisioning coverage standing tall at 91% against 49% in FY08 is an important shield.
Cost-to-income: Slowing pace
VYSB maintains its target of reducing cost-income ratio closer to 50% over the next three-four years (currently at 59%). However, conceding the fact that current macro headwinds limit the opportunity to grow income faster prudently, management believes that improvement in cost-income ratio will not be in a liner fashion. Also, major part of branch expansion of current fiscal (30 branches) could be executed in H2FY13 aiming to strike an optimum balance between growth and cost.
Outlook and valuations: Steady growth; maintain ‘BUY’
Provisioning coverage of 91% (49% in FY08) and marginal exposure to stressed sectors like textiles and power should allay concerns over asset quality. With steady growth (loan CAGR of 20% over FY12-14E) and benign credit cost (47bps) coupled with decline in opex ratio, earnings are expected to post 18% CAGR over FY12-14E. This will translate into ROA of 1.1% and ROE of ~14% in FY14E. VYSB is currently trading at 1.3x FY13E ABV and 10.6x FY13E EPS. We maintain ‘BUY/Sector Outperformer’.
Regards,
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