ING Vysya Bank: Potential re-rating candidate

Strong asset quality and healthy growth prospects key positives; attractive valuations point to a favourable risk-reward equation

ING Vysya Bank has delivered healthy loan growth and asset quality trends through the past six-eight quarters, despite the tough macroeconomic environment. Though loan growth has recently slipped to 13 per cent (in line with the industry slowdown), the bank’s efforts to improve productivity and its prudent lending practices have helped sustain its credit and earnings quality.

The trend is likely to continue. Analysts expect ING Vysya to record growth of 20-22 per cent in net profit through FY13-15, owing to growth in loans and control over costs. Growth is expected to be driven by the small and medium enterprises (33 per cent of loan book) and retail segments.

The bank has also increased focus on high-margin products such as gold loans and loan against property, which now account for about half the incremental retail disbursements. Amid such an environment, most analysts remain positive on the bank, which has outperformed its peers such as IndusInd Bank and YES Bank in the last one-two years. At Rs 490, the stock is currently trading at a reasonable 1.1 times its estimated adjusted book value for FY14, in line with its historical average one-year forward price/book value ratio.

“ING Vysya is currently trading at 1.1 times the 12-month forward book, but we believe it could re-rate to 1.7 times on the back of strong fundamentals, its ability to grow faster and an improving return profile,” says Rahul Jain, banking analyst at Goldman Sachs Research. He has a target price of Rs 640 on the stock, an upside of 30 per cent from current levels.

However, increasing competition and the worsening macro and execution issues, which could make deposit gathering a more expensive exercise, are key risks for the bank, as well as the industry.

Also, as analysts point out, the bank’s yields could see pressure despite the recent 20-basis-point rise in base rates, due to limited pricing power at the top-end of quality companies. With pressure on the low-cost current account and savings account, or Casa, deposits (Casa ratio fell 230 basis points sequentially in the quarter ended June) and given the rising interest-rate environment, this could rub off negatively on its net interest margin (NIM) in the near term.

But there is a flip side as well. “Going forward, while the sharp rise in short-term rates could hit NIM, it could be partially offset by the recent capital infusion of Rs 1,800 crore,” says Kaitav Shah, analyst at Anand Rathi Securities.

The bank is taking various steps to improve profitability, which would bear fruit in the medium term. ING Vysya’s focus on improving efficiency has led to a 14.8 per cent fall in its cost-to-income ratio through 2005-09 at 64.5 per cent; it stood at 56.2 per cent in 2012-13. Analysts expect this metric to further fall to 52 per cent levels through the next couple of years. The bank is focusing on improving its employee productivity, brand awareness and product mix. Apart from pushing cost efficiencies, these efforts would lead to a higher Casa ratio for the bank, analysts say.

The bank’s management remains fairly confident of maintaining its asset quality, except for minor pressures on its mid-corporate loan book. ING Vysya has reduced its gross non-performing assets ratio from three per cent in 2009-10 to the prevailing 1.75 per cent. Its well-diversified loan book, along with strong credit appraisal and underwriting practices, led to the improvement.  ING’s restructured assets are relatively low, at one per cent of total advances; net non-performing assets stood at just 0.2 per cent in the June quarter. Its high provision coverage ratio could adequately take care of any asset quality shock.

“Despite uncertainties surrounding macros, the bank’s well capitalised position, coupled with high provision coverage of 89 per cent and marginal exposure to stressed segments lends comfort,” says Nilesh Parikh, banking analyst at Edelweiss Securities. Parikh has a ‘buy’ rating of the stock, with a target price of Rs 640.