Proven competitive advantages
ING Vysya Bank (IVB) has proven its competitive advantages over
other regional banks through better geographical diversification, lowcost deposits franchise, better fee income generation capability and
better asset quality. These advantages have led to a stock rerating. We
expect its valuation gap with private sector banks to narrow further
over the next two years. Moderation in the cost-to-asset ratio and
containment of credit costs would lead to an RoA improvement of
10bps by FY15, at a time when most of IVB’s peers would face RoA
declines. Moreover, IVB is well placed to face any adverse asset quality
shocks in the near term, owing to its less risky loan book, high
provision coverage ratio and high capital ratio. We initiate coverage
with a BUY stance.
Competitive position: MODERATE Changes to this position: STABLE
Continued RoA improvement over the last four years: After a muted RoA
performance until FY09, IVB has improved its RoAs by 55bps in FY09-13 and
has delivered a 29% EPS CAGR during this period. The company de-risked its
loan book by: (1) increasing the proportion of collateralised SME loans, (2)
realigning its balance sheet towards higher interest earning assets, and (3)
improving its operational efficiency in terms of bringing down the cost-toincome ratio by ~830bps. Thus, its RoAs have improved in FY09-13.
Narrowing the valuation gap to new private sector banks: A favourable
loan mix change towards higher-yielding assets, a pick up in low-cost CASA
deposits and improving productivity of urban and metro branches that were
opened in recent years would lead to an RoA improvement of 10bps by FY15.
This improvement will take place at a time when most peer banks would see
RoA compression. This, we believe, would further narrow down the valuation
gap to new private sector banks (currently at 35% vs 52% in August 2011).
Strong buffer to protect from any asset quality shocks: Negligible
exposure to stressed sectors in the corporate book and a well-performing SME
book, provision coverage and capital ratio mean that IVB is relatively better
placed vs its peers to absorb system-wide asset quality shocks vs its peers.
Initiate with BUY stance and a target price of `626: We initiate coverage
with a BUY stance and a target price of `626 (implied one-year forward P/B of
1.6x and one-year forward P/E of 14.0x) based on the EVA approach. Our EVA
model assumes sustainable steady-state RoAs of 1.4% beyond the next three
years and a cost of equity of 14%. The main catalysts for IVB are stable asset
quality and pick up in branch expansion with contained cost ratios. The key
risk to our BUY stance is the higher-than-expected weakness in the macroeconomic environment which would affect the credit quality of SME borrowers.
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ING Vysya Bank (IVB) has proven its competitive advantages over
other regional banks through better geographical diversification, lowcost deposits franchise, better fee income generation capability and
better asset quality. These advantages have led to a stock rerating. We
expect its valuation gap with private sector banks to narrow further
over the next two years. Moderation in the cost-to-asset ratio and
containment of credit costs would lead to an RoA improvement of
10bps by FY15, at a time when most of IVB’s peers would face RoA
declines. Moreover, IVB is well placed to face any adverse asset quality
shocks in the near term, owing to its less risky loan book, high
provision coverage ratio and high capital ratio. We initiate coverage
with a BUY stance.
Competitive position: MODERATE Changes to this position: STABLE
Continued RoA improvement over the last four years: After a muted RoA
performance until FY09, IVB has improved its RoAs by 55bps in FY09-13 and
has delivered a 29% EPS CAGR during this period. The company de-risked its
loan book by: (1) increasing the proportion of collateralised SME loans, (2)
realigning its balance sheet towards higher interest earning assets, and (3)
improving its operational efficiency in terms of bringing down the cost-toincome ratio by ~830bps. Thus, its RoAs have improved in FY09-13.
Narrowing the valuation gap to new private sector banks: A favourable
loan mix change towards higher-yielding assets, a pick up in low-cost CASA
deposits and improving productivity of urban and metro branches that were
opened in recent years would lead to an RoA improvement of 10bps by FY15.
This improvement will take place at a time when most peer banks would see
RoA compression. This, we believe, would further narrow down the valuation
gap to new private sector banks (currently at 35% vs 52% in August 2011).
Strong buffer to protect from any asset quality shocks: Negligible
exposure to stressed sectors in the corporate book and a well-performing SME
book, provision coverage and capital ratio mean that IVB is relatively better
placed vs its peers to absorb system-wide asset quality shocks vs its peers.
Initiate with BUY stance and a target price of `626: We initiate coverage
with a BUY stance and a target price of `626 (implied one-year forward P/B of
1.6x and one-year forward P/E of 14.0x) based on the EVA approach. Our EVA
model assumes sustainable steady-state RoAs of 1.4% beyond the next three
years and a cost of equity of 14%. The main catalysts for IVB are stable asset
quality and pick up in branch expansion with contained cost ratios. The key
risk to our BUY stance is the higher-than-expected weakness in the macroeconomic environment which would affect the credit quality of SME borrowers.
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