Motilal Oswal: buy ING VYSYA BANK: Quality growth; Attractive valuation; target price Rs475

 ING VYSYA BANK: Quality growth; Attractive valuation; Buy with target price of Rs475, 26% upside

ING Vysya Bank (VYSB IN; Mkt Cap USD1b, CMP Rs378, Buy) is turning around rapidly with RoA improving from -0.3% in FY05 to 0.7% in FY10 (despite higher credit cost) and further to 1% by FY12E. As legacy issues subside, we believe IVB is all set to accelerate loan growth and improve market share. We expect earnings CAGR of 33% over FY10-13E on the back of improving loan growth, stable margins, operating leverage and lower credit cost. We expect RoE to improve ~17% by FY13.

-          Growth to resume with focus on quality: IVB's growth over the last decade was lower than industry as it focused on restructuring its balance sheet, and raising employee and branch profitability. Now, with systems and processes in line with large private sector banks, IVB is focusing on growing high yielding retail and SME loans (its key expertise). As risk appetite resumes and legacy issues subside, we expect IVB to report FY10-13 loan CAGR of 24% (higher than 20% for the industry) to be driven by core retail liabilities. We expect stable 33% CASA ratio through FY13.

-          Operating leverage to boost RoA: IVB's focus on raising branch and employee productivity is leading to improvement in cost to core income (C/I) ratio and RoA. Productivity has improved in the last 3-4 years, but remains lower than peers. We believe there exists significant opportunity for further improving branch and employee profitability, leading to operating leverage. By FY13, we expect Cost to Core income ratio to improve to 56% (vs 63% in FY10, 85% in FY06) and cost to average assets to 2.28% (vs 2.46% in FY10 and 3.23% in FY06).

-          Fall in credit cost to drive earnings growth: In FY10, credit cost rose to 1.3% (vs FY04-09 average of 0.6%), led by (1) higher slippages from unsecured personal loans, (2) conservative restructuring policy, and (3) improving coverage ratio. We expect credit cost to fall to 1% in FY11 and 0.8% in FY12 on the back of lower unsecured personal loans and improved economic scenario.

-          Earning CAGR of 33%, attractive valuation; Buy with target price of Rs475: Over FY10-13, we expect core operating profits CAGR of 26% and EPS CAGR of 33% on the back of (1) strong loan growth, (2) stable margins, (3) operating leverage, and (4) lower credit cost. RoA is expected to improve from 0.7% in FY10 to ~1% by FY13 and RoE from 11.6% in FY10 to ~17% by FY13. IVB trades at 11x FY12 EPS of Rs35, and 1.6x FY12 BV of Rs238. High growth coupled with improving return ratios will lead to re-rating. We initiate coverage with a Buy rating and a target price of Rs475 (2x P/BV FY12), an upside of 26%.