ING Vysya Bank: Re-rating on the cards

Improving profitability, strong asset quality and strong growth prospects are key positives. Attractive valuations offer attractive risk-reward

ING Vysya Bank (ING) has delivered robust loan growth and asset quality trends over the past six-eight quarters despite the tough macro environment. The bank’s efforts to improve productivity and prudent lending practices have boosted its credit as well as earnings quality. Analysts expect ING to deliver 20-22 per cent net profit growth over FY13-15. Its loan growth is pegged at 23-24 per cent over the same period.

The bank’s future growth will be driven by SME (33 per cent of loan book) and retail segments. It has also increased focus on high-margin products such as gold loans and loan against property, which now form about half of incremental retail disbursements.

At Friday’s closing price of Rs 499 per share, the stock trades at 1.3 times estimated adjusted book value for FY14; in-line with its historical average one-year forward price/book value ratio. Most analysts remain positive on the bank.

“ING Vysya is currently trading at 1.1 times 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 improving return profile”, says Rahul Jain, Banking analyst at Goldman Sachs Research. He has a target price of Rs 640 on the scrip, implying upsides of 28 per cent from Friday’s closing price.

Increasing competition, worsening macro and execution issues which could make deposit gathering a more expensive exercise are the key risks for the bank going forward. It also has limited pricing power as far as lending to quality corporates is concerned. A rising interest rate environment could thus rub off negatively on its net interest margin (NIM).

“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.

ING’s focus on improving efficiency has led to fall in the bank’s cost to income ratio 14.8 per cent over FY05-09 to 64.5 per cent and stood at 56.2 per cent in FY13. Going forward, analysts expect this metric to futher come down to 52 per cent levels over the next couple of years. The bank is focussing on improving its employee productivity, brand awareness and product mix. Apart from pushing cost efficiencies, these efforts will lead to a higher CASA ratio for the bank, believe analysts.

The bank management remains fairly confident of maintaining its asset quality except for some minor pressures on its mid-corporate loan book. Notably, ING has reduced its gross non-performing assets (GNPA) ratio from 3.0 per cent in FY10 to about 1.75 prevailing. Its well-diversified loan book along with strong credit appraisal and underwriting practices have led to this improvement. ING’s restructured assets too are relatively lower at 1 per cent of total advances. Going forward as well, its high provision coverage ratio can adequately take care of any asset quality shocks.

“Despite uncertainties surrounding macros, the bank’s well capitalized position coupled with high provision coverage 89 per cent and marginal exposure to stressed segments lends comfort”, says Nilesh Parikh, Banking analyst at Edelweiss Securities.