ING VYSYA Bank - Credit Profile & Asset Quality to Boost Growth: Karvy

ING Vysya Bank – the only Indian bank with an MNC setup – is likely to sustain
earnings growth of 27% on the back of higher‐than‐industry growth in credit,
stable NIMs, ushering in of operational leverage, and while enjoying one of the
best asset qualities in domestic banking space. We initiate coverage on the Bank
with “BUY” recommendation with a target price Rs. 465 per share.

��


Strong Credit Growth with Diversified Loan Book: Improving sharply from
moderate growth, the Bank’s credit growth has outpaced the industry by 3‐5% in
FY11 & FY12 especially after the appointment of new management. The Bank
has also guided that such outperformance to continue, going ahead. It has a
diversified loan book with major exposure to corporate (43%) followed by SME
(32%), and retail banking (20%).
Improving Asset Quality with Lowest Slippage, No Exposure to Ailing Sector:
The Bank’s asset quality has shown sharp improving trends for the past two
years as against sharp deterioration reported by its peers. It has negligible
exposure in any of the ailing sectors like aviation, SEBs, realty and oil companies,
etc. It mainly focuses on the working capital requirements of corporate, where it
has a better control on its cash flow. Despite an overall deteriorating economic
environment, the Bank has reported lowest slippage of only 0.66% in comparison
to its peers, while its gross NPA of only ~0.3% in SME segment is remarkable.
Operational Leverage to Boost ROA: The Bank has so far been able to
successfully manage its cost by bringing down the cost‐to‐income ratio to 59.5%
in FY12 from 83.4% in FY06. The proportion of unionized staff has declined from
4/5th to 1/3rd of total employee base. However, we believe that there is still lot of
scope for further improvement in operational leverage by capitalizing on its
technology platform, improving employee productivity and higher growth in
asset base. As a long‐term strategy, the Bank plans to bring down cost‐to‐income
ratio close to 50% in next 3 years.
Outlook & Valuation
Asset quality is a key catalyst for the bank with reported slippage under 0.7% in
FY12. It is adequately capitalized and does not need to raise equity capital for
another 3 years. We expect its ROA to augment by 17bps over FY12‐14. Lower
financial leverage with Tier I CRAR of 11.2% has suppressed ROE. We initiate
coverage on ING Vysya Bank with “BUY” recommendation with a target price
Rs. 465 per share valuing the stock at 1.4x P/ABV FY14E based on its historical
mean valuation.