Customer asset growth to beat system; retail and SME key drivers
ING Vysya Bank’s (IVB) is confident of growing its customer assets (loans + credit substitutes) ahead of the banking system in current fiscal. SME book (~33% of adv) which is diversified across sectors has been growing at strong pace. Retail portfolio (~26% of adv) is witnessing healthy growth aided by robust traction in products such as LAP, Gold Loan, Personal Loans and Vehicle Loans. Bank to pursue selective growth in the mid-corporate segment.
Multiple tailwinds for NIM to bounce
While IVB’s NIM could dip by 20-30bps in Q2 FY14 due to higher wholesale rates, it is expected to recover sharply in H2 FY14. Key margin levers will be 1) utilization of equity proceeds (raised Rs18.4bn in June 2013) for funding asset growth 2) loan mix shift towards better-yielding SME/Retail loans and 3) 20bps Base Rate hike that will re-price large portion of corporate/SME loans. A more benign liquidity scenario in FY15 would push bank’s NIM to a multi-year high.
Improvement in cost/income ratio to continue
Though bank has initiated calibrated branch expansion, the improvement in margin and some recovery in fee growth should drive further efficiency gains over medium term. We see cost/income ratio declining to 51.8% in FY15.
Asset quality healthy but for the mid-corporate piece
IVB’s asset quality could continue to behave resiliently due to 1) pre-dominant working capital funding and lower exposure to sensitive sectors within corporate segment 2) robust underwriting/monitoring processes in SME segment and 3) material retail asset contribution. However, with stress emerging in mid-corporate segment, some normalization in delinquency trend is expected. High PCR of ~90% would cushion credit cost in the current year.
Estimate RoA at 1.3% in FY15; retain BUY with 9m TP of Rs682
Secular improvement in cost/income ratio will provide room for absorbing higher credit costs. We estimate IVB to deliver strong 20% earnings CAGR over FY13-15. Current valuation at just above six-year mean does not fully discount accomplished and potential improvement in profitability metric.
|Y/e 31 Mar (Rs m)||FY12||FY13||FY14E||FY15E|
|Total operating income||18,781||22,655||26,384||32,605|
|Yoy growth (%)||13.0||20.6||16.5||23.6|
|Operating profit (pre-provisions)||7,679||9,927||11,811||15,700|
|yoy growth (%)||43.2||34.3||10.0||31.5|
|Adj. BVPS (Rs)||254.6||291.6||367.2||401.3|
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