Downgrade ING Vysya Bank to HOLD - Steady Performer, but Positives Priced-in - Karvy

ING Vysya Bank is currently trading at 25% premium to its five year average valuation, while the stock has outperformed the Bankex by 40% over last one year on account of its superior asset quality, earning consistency and improving efficiency.

Strong Credit Growth with Diversified Loan Book Improving sharply from moderate growth, ING Vysya Bank' credit growth has outpaced the industry by 3-5% in FY11 & FY12 especially after the appointment of new management. Meanwhile, the Bank has also guided that such outperformance to continue, going ahead.

Improving Asset Quality with Lowest Slippage, No Exposure to Vulnerable Sector: The Bank's asset quality has shown sharp improving trends over the past two years compared to sharp deterioration reported by its peers. The Bank has negligible exposure in any of the ailing sectors like aviation, SEBs, realty and oil companies, etc. The Bank mainly focuses on the working capital requirements of corporates, where it has a better control on its cash-flow. Its gross NPA of only ~0.3% in SME segment is remarkable.

Operational Leverage to Boost RoA: The Bank has so far been able to successfully manage its cost by bringing down cost-to-income ratio to 59.5% in FY12 from 83.4% in FY06. The proportion of unionized staff has declined from 4/5th to 1/3rd of total employee base. As a long-term strategy, the Bank plans to bring down cost-to-income ratio close to 50% in next three years.

Outlook & Valuation

At the CMP, the stock trades at 12.3x & 10.2x FY14E & FY15E earnings, and at 1.8x & 1.5x P/ABV FY14E & FY15E, respectively. Based on 20% premium to its historical mean valuation implying 1.65x P/ABV FY15E, we downgrade our recommendation on ING Vysya Bank to "HOLD" from "BUY" on the back of the recent run up in the stock price, with upwardly revised target price of Rs. 625 per share (from Rs. 495 earlier).

Source : Equity Bulls

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