ING Vysya Bank: Buy

Fresh investments can be considered in the stock of ING Vysya Bank (Vysya Bank), an old-generation private sector bank. Vysya Bank, promoted by ING, a global financial institution, has majority of its branches in South India.

Even as the bank enjoys high fee incomes, a high proportion of low-cost deposits and good provision coverage on bad loans — in line with new private banks — the stock trades at a huge discount to these banks.

The bank also has a diversified lending book with little exposure to troubled sectors such as aviation and power distribution. The bank enjoys capital support from its parent, which is favourable, especially in the light of high capital requirement for Basel-III.

At the current price of Rs 356, the stock discounts its estimated FY13 adjusted book value by 1.25 times. At this multiple, it trades at a discount to new private banks and in line with similar-sized old private banks.

The price-earnings multiple works out to 9.4 times its FY-13 estimated earnings. The earnings multiple seems to be undemanding for the stock as Vysya Bank clocked 20.5 per cent annual growth in earnings per share during the period FY08-FY12. EPS growth was high in spite of dilution in equity twice during this period.

The bank's profitability over the last three years has improved significantly, as it tried shedding its legacy costs and cleaned up its balance-sheet. There is scope for further rise in return ratios if the bank reduces operating costs. The cost-to-income ratio of 59 per cent is high as compared to other private players which operate at a ratio of less than 50 per cent.

Profitability to improve

The profitability ratio will go up as the bank improves the productivity of its under-leveraged branches. To put it in perspective, Vysya Bank with 527 branches has a Rs 47,000 crore balance-sheet size as compared to Rs 73,660 crore in case of Yes Bank which has only 356 branches.

Not only is the bank going slow on branch expansion, it is also widening its presence outside South India. The rising proportion of branches in urban and metros, where ING is a recognisable brand, will help it get more retail and HNI customers.

The relationship with ING will also give access to large corporate clients — aiding its loan book as well as fee income growth.

The loan book of the bank, which grew at a modest rate of 12.3 per cent annually over the period 2008-10, moved to higher growth path during the FY-11 fiscal. During the FY-12 fiscal, the loan book grew at a higher-than-industry rate of 21.6 per cent.

The loan book is diversified in terms of industry exposure. High-yielding SME loans, coupled with secured loans such as loan against property, are expected to help the bank maintain its margins. The bank is also planning to re-introduce some of its products (such as commercial vehicle loans and unsecured personal loans) and has also begun lending against gold on a select basis.

Margins can be maintained

The bank's cost of funds spiked during the fourth quarter. Dependence on certificate of deposits and necessary investments to meet priority sector lending requirements have pulled down the net interest.

However, FY12 margin of 3.3 per cent margin may be sustainable, given that the cost of wholesale deposits have come down and the bank may also improve its retail deposit proportion.

Additionally, more retail and SME products, as mentioned above, will also support margins at 3.3 per cent levels.

CUSHIONED FROM loan slippages

The bank's gross non-performing loans (NPL) was at 1.92 per cent as of March 2012, down from 2.34 per cent a year ago- an improvement during the period when banking sector witnessed sharp deterioration in asset quality.

The slipped asset proportion may seem to be high; however, the company hasn't written of any NPLs in the last couple of years as compared to other banks.

This would mean the NPLs of other banks were higher than the reported ratio if they hadn't written them off. Even with close to 2 per cent NPLs, thanks to conservative provisioning coverage of 91 per cent, the net NPL ratio of the bank is 0.18 per cent.

The restructured proportion at 1.4 per cent of advances is also low.

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