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Suresh Krishnamurthy

Mr Bart Hellemans (left), MD and CEO; Ms Kavita Hurry, MD and CEO, ING Vysya Mututal Fund; and Mr Yuo Metzelaar, MD and CEO, ING Vysya Life Insurance... Carving a niche in retail banking.

SHAREHOLDERS of ING Vysya Bank should subscribe to the rights offer. The three shares for every share held offer is being made at a substantial discount to the market price. As such, any failure to subscribe would lead to substantial erosion in the value of their holdings. As regards existing holdings, shareholders can continue to retain their holdings. Fresh purchases can be made after observing the performance for the quarter ended March 2005.

Clean-up act

ING Vysya Bank has put through a massive clean up of balance-sheet over the past couple of years. The bank had written-off assets, jacked up the provision for non-performing assets and made some even for some non-banking assets.

It has also been making provision for losses suffered by associates, mainly ING Vysya Life Insurance, in which the bank holds a sizeable stake. These provisions and depreciation have pulled down the bank's profits.

Just when the need for provisions for bad loans fell, the bank has had to deal with rising interest rates. This required additional provisions for depreciation in the value of investments and the bank reported losses for the nine months ended December 2004.

The bad news on the earnings front is, however, largely over. Losses suffered on the sale of government securities are not likely to recur in the near future. The provision for bad loans is also set to drop. The bank, however, would need to continue to make provision for the losses suffered in the insurance venture. This would not pull down the profit growth if the core banking business growth continues.

Core turnaround

After March 2002, the core banking business has been growing at a robust 20 per cent. This, however, did not lead to any significant increase in profits from core banking since the bank's spreads were considerably less than that of the competition. Since April 2004, however, profitability of the core banking improved considerably.

This was built mainly around an improvement in spreads. Spreads (the difference between the rate at which funds are lent and borrowed) were much less than 3 per cent for ING Vysya Bank even in the year ended March 2004. In contrast, many public sector banks enjoyed spreads in excess of 3 per cent and many private sector banks even higher.

For the nine months ended December 2004, ING Vysya Bank's spreads rose to about 3.2 per cent mainly due to the reduction in the cost of deposits; at about 4.7 per cent, the latter (at end-December 2004) is one of the lowest in the industry.

In the backdrop of the improved spreads, if the bank sustains the growth in advances, that in profitability would be strong in the years ahead.

Attractively valued

Post-rights, the book value per share of ING Vysya Bank is about Rs 103. If the profits for the quarter ended March 2005 are considered, the book value would be higher by at least another Rs 10 per share. This pegs the price-to-book ratio for the bank at about 1.2 times.

Given the potential for strong growth in profits, the bank's valuation is attractive. It may, however, be better to wait for the performance in the quarter ended March 2005 before making fresh purchases.

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