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| ING Vysya Bank (VYSB IN) 4Q FY14: Positive surprise on margins | Overweight Price: Rs550.60 29 Apr 2014 Price Target: Rs620.00 PT End Date: 31 Mar 2015 | |
ING Vysya Bank reported PAT of Rs1.39B (down 18% y/y, 19%< JPMe) mainly on account of one-off retirement benefit provisions. Margin improvement surprised us positively. Asset quality deteriorated during the quarter, in line with our expectation. Customer asset growth remained subdued given the weak macro. We maintain our OW on the stock given what we believe to be conservative management and strong deposit profile.
Table 1: 4Q FY14 result s
Rs MM, YE Mar.
|
4Q 13
|
3Q 14
|
4Q 14
|
YoY
|
QoQ
|
NII
|
4,237
|
4,161
|
4,713
|
11.2%
|
13.3%
|
Other income
|
2,004
|
2,146
|
2,234
|
11.5%
|
4.1%
|
Opex
|
3,398
|
3,564
|
3,836
|
12.9%
|
7.6%
|
PPOP
|
2,843
|
2,743
|
3,111
|
9.4%
|
13.4%
|
Provisions
|
336
|
230
|
406
|
20.8%
|
76.4%
|
PBT
|
2,507
|
2,513
|
2,705
|
7.9%
|
7.7%
|
Tax rate
|
804
|
839
|
703
|
-12.5%
|
-16.2%
|
PAT
|
1,703
|
1,673
|
2,002
|
17.6%
|
19.6%
|
NIM
|
3.73%
|
3.55%
|
3.74%
|
0.01%
|
0.19%
|
Cost-Income
|
54.5%
|
56.5%
|
55.2%
|
0.77%
|
-1.29%
|
Tax rate
|
32.1%
|
33.4%
|
26.0%
|
-6.08%
|
-7.41%
|
Balance sheet data
| |||||
Loans
|
317,720
|
340,484
|
358,289
|
12.8%
|
5.2%
|
Deposits
|
413,340
|
389,560
|
412,168
|
-0.3%
|
5.8%
|
CASA Ratio
|
32.5%
|
34.7%
|
33.4%
|
0.9%
|
-1.3%
|
Asset Quality
| |||||
Gross NPA
|
5,702
|
5,827
|
6,442
|
13.0%
|
10.6%
|
Net NPA
|
91
|
731
|
1,020
|
-
|
39.5%
|
Gross NPA (%)
|
1.76%
|
1.68%
|
1.77%
|
0.0%
|
0.1%
|
Net NPA(%)
|
0.03%
|
0.21%
|
0.28%
|
0.3%
|
0.1%
|
Credit cost
|
0.42%
|
0.28%
|
0.46%
|
0.0%
|
0.2%
|
Source: J.P. Morgan estimates, Company data.
· Margins. Margin improved by 19bp q/q and stood at 3.74% in 4Q FY14, mainly on account of lower COD which declined by 13bp q/q to 7.21%. This was, however, offset by lower YOA which declined by 8bp q/q due to higher growth in low-yielding agri loans. SA balance growth remained strong at 10% q/q; however CA balance declined by 6% q/q which led to a decline in CASA ratio by 130bp to 33.4%.
· Asset quality. Asset quality deteriorated with incremental slippages at 1% v/s 0.3% in the previous quarter; this resulted in higher credit costs of 0.46% v/s 0.28% in 3Q14. Mid corporate segment contributed to the higher slippages during the quarter. Given the weak macro environment we expect credit costs to remain elevated in the medium term. We maintain our credit cost expectation of 64bp for FY14.
· Customer asset growth. Customer assets growth remained subdued at 12% y/y and 6% q/q. Growth was mainly driven by SME and Agri loans. Corporate loan growth was subdued at 3% y/y given the weak macro. Deposit growth was flat y/y due to equity-raising during the year and lower reliance on wholesale deposits.
· One-off provisions. The bank provided Rs611MM towards retirement benefits for certain employees covered under the defined benefit scheme as mandated by RBI on a retroactive basis. This resulted in a sharp decline in profits; adjusting for this, profit growth was 18% y/y.
Table 2: DuPont analysis
3Q 12
|
4Q 12
|
1Q 13
|
2Q 13
|
3Q 13
|
4Q 13
|
1Q 14
|
2Q 14
|
3Q 14
|
4Q 14
| |
NIM
|
3.06%
|
2.89%
|
2.53%
|
3.09%
|
3.23%
|
3.33%
|
3.23%
|
3.12%
|
3.03%
|
3.01%
|
Fees/Assets
|
1.56%
|
1.77%
|
1.22%
|
1.38%
|
1.38%
|
1.46%
|
1.65%
|
1.34%
|
1.39%
|
1.43%
|
Operating Expense/Assets
|
-2.67%
|
-2.68%
|
-2.19%
|
-2.60%
|
-2.61%
|
-2.67%
|
-2.60%
|
-2.47%
|
-2.60%
|
-2.45%
|
Provisions/Assets
|
-0.32%
|
-0.51%
|
-0.05%
|
-0.05%
|
-0.20%
|
-0.26%
|
-0.52%
|
-0.13%
|
-0.17%
|
-0.26%
|
ROA
|
1.13%
|
1.15%
|
1.11%
|
1.26%
|
1.30%
|
1.34%
|
1.33%
|
1.25%
|
1.22%
|
1.28%
|
Source: J.P. Morgan estimates, Company data.
Figure 1: Lower funding costs led to improvement in margins
Source: Company data.
Figure 2: Strong growth in SA balance during the quarter
Source: Company data.
Figure 3: Loan growth remained below industry average
Source: Company data.
Investment Thesis
We are OW on the stock, as:
- VYSB is countercyclical to peers as it operates in a low-yield space with a focus on deposit quality; this entails sacrificing growth rates relative to its size. This is, however, compensated by improving operating efficiency and greater asset quality resilience.
- VYSB’s strong deposit profile (lower cost than that of many midsize peers such as IIB and Yes) is likely to get stronger with moderate growth and an existing branch network already in place.
Valuation
Our Mar-15 PT for VYSB of Rs620 is based on a 2-stage Gordon growth model implying 1.5x Mar15E book. Our valuation factors in a cost of equity of 15.7%, normalized ROE of ~19%, and terminal growth of 5%.
Risks to Rating and Price Target
(1) Execution issues with deposit-gathering, causing the need to push up opex. (2) A spike in interest rates throwing NIMs off balance.
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