ING Vysya Bank - Steady growth, improving productivity, stable asset quality; Buy - Anand Rathi

A consistent outperformer. ING Vysya Bank (ING) has grown faster than the system continuously over the past eight quarters. The bank has a welldiversified loan book with the share of corporate loans at 41%, business banking at 33%, consumer banking at 20% and agri at 7% as at end of Jun'13. The bank expects to continue to grow at fast pace, with primary focus on SME and retail segments.

Productivity continues to improve. The bank has enhanced its focus on high-yield products like gold loans and LAP (now ~50% of incremental retail disbursements). Consequently, NIM remains buoyant at +3.5%. 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. 18bn. The bank's focus over the past two years has been on improving its productivity by leveraging the existing infrastructure. Hence, cost-to-assets has steadily decreased, reaching 2.5% at end FY13 against 2.8% in FY11. We expect cost-assets to decrease to 2.3% by FY16 from 2.5% currently.

Sound asset quality to sustain. ING has demonstrated consistent improvement in asset quality over the past three years despite a tough macro environment. GNPA declined to 1.75% of advances at end Jun'13 from 3.0% in FY10. This is a result of sound underwriting standards and credit appraisal processes. With healthy asset quality and low levels of restructured assets (1.0% of advances), credit costs are unlikely to constrain earnings growth over FY13-15.

Our take. Factoring in higher short-term interest rates, we trim our PAT 3.9% and 3.5% for FY14e and FY15e, respectively. On lower RoE, we cut our target price to Rs. 689 and value the bank at 1.8x FY14e BV (1.9x earlier). However, faster-than-system credit growth, improving productivity and sound asset quality could aid expansion of RoA to 1.5% by FY16 (1.2% in FY13). We reiterate Buy. Our target is based on the two-stage DDM (CoE: 13.5%; beta: 0.8; Rf: 8%). Risks. Slower economic growth could hit loan growth and credit quality.

Source : Equity Bulls

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