Stock pick from the finance sector

In the current economic scenario, where the asset quality of banks is being impacted and net interest margins are shrinking, most readers would be surprised to see a banking scrip being recommended. However, we have enough compelling reasons to recommend ING Vysya Bank to investors.

The principal factor is the strong financial performance reported by the company for the quarter ended December 2011. Secondly, in a scenario where most banks are finding it difficult to show growth in business, ING Vysya has managed to post above industry average growth. It has showed remarkable improvement in its net interest margins, while most of the leading banks have failed to do so. Further, despite the poor economic scenario, its asset quality has also improved. On the valuations front too, the scrip is placed quite well, with the price to book value at 1.30x. This is much better as compared to that of 1.82x of ICICI Bank and 2.50x of Axis Bank.

As mentioned earlier, the business growth for ING Vysya Bank has been very good. Even in a difficult macro-economic scenario, the advances have grown by 22.20 per cent to Rs 26752 crore. The growth is well above the industry average of 15.90 per cent and the RBI’s projected credit growth of 18 per cent. This is mainly driven by traction in wholesale banking and business banking. SME and secured retail loans (mortgages) also helped the bank grow faster. In a presentation, the company’s management mentioned 22 per cent advances growth for FY12, which indicates sustained growth going ahead. The bank is well capitalised, with a CAR of 14.08 per cent and Tier 1 CAR at 10.99 per cent. The management has stated that there is no further requirement of capital for the next two years.

Notably, the company saw some quality growth. This is evident from the fact that its asset quality has improved. The gross NPAs decreased by 65 basis points to 2.01 per cent, while the net NPAs contracted by 33 basis points to 0.31 per cent YoY. Further, the exposure to sectors like power, telecom and airlines is low.

The deposit growth also stood at 16.1 per cent, as deposits touched Rs 31654.5 crore. This was in line with the industry average. However, the CASA declined marginally to 32.60 per cent in the December 2011 quarter from 33.50 per cent in December 2010. The management has stated that there are no plans to increase the savings account interest rates as many private banks opted to do after deregulation. However, the expansion of the branch network will be helpful. The bank has added 17 branches in 9M FY12, and is looking to expand aggressively in March 2012.

Another favourable factor is that even in a high interest rate regime, its Net Interest Margin (NIM) improved by 39 basis points to 3.49 per cent YoY and by 14 basis points QoQ. The management expects the same to be sustained ahead.

The financial performance for December 2012 has been good. On a YoY basis, the Net Interest Income (NII) increased by 32 per cent to Rs 323.6 crore, while the net profit grew by 44 per cent to Rs 119.5 crore. A reversal in the interest rate cycle in the coming quarters will benefit the bank going ahead. It has showed an improvement on almost all parameters on a YoY basis. We feel that the bank is in a decent shape, and one can invest in the scrip in a staggered manner, with a one year horizon.