We maintain our buy recommendation on ING Vysya Bank (VYSB) and have set the price target of R425. We recently met the top management of the bank and it sounded confident of maintaining benign asset quality metrics. However,current macro challenges are likely to limit cost-to-income improvement.
VYSB management confidently articulated its ability to further deliver on robust asset quality despite 30% SME exposure (with GNPL in the segment around 0.3% and NNPL in the negative). VYSB attributes the same to better underwriting,adequate collateral cover (including property),consumption-driven growth,working capital focus,and sole banker in most cases. Further,exposure to mid-corporate segment (weak point in previous downturn of FY08) has come off from 50% to 30% of wholesale banking,which coupled with the banks marginal exposure to stressed sectors should contribute to robust asset quality. Provisioning coverage standing tall at 91% against 49% in FY08 is an important shield.
Provisioning coverage of 91% (49% in FY08) and marginal exposure to stressed sectors like textiles and power should allay concerns over asset quality. With steady growth (loan CAGR of 20% over FY12-14E) and benign credit cost (47bps) coupled with decline in operating expenses ratio,earnings are expected to post 18% CAGR over FY12-14E. This will translate into return on assets (RoA) of 1.1% and return on equity (RoE) of ~14% in FY14E. VYSB is currently trading at 1.3x FY13E accredited in business valuation (ABV) and 10.6x FY13E earning per share (EPS).
Over the past three years,VYSB has built a strong platform delivering consistent and improved performance in key ratios reaffirming a turnaround in the bank. The bank has improved its fee income contribution in line with the leaders,leveraged its balance sheet at lower cost and hence,improved RoEs to ~13% in FY10. Given the credit crisis and the subsequent impact on global economies,including India,the banks conscious cautious strategy benefited with lower impact on asset quality (including restructuring). Edelweiss