We reiterate ‘buy’ rating on ING Vysya Bank and target Rs 785 per share, valuing the stock at 2.0x FY16e price-to-book (P/B). The stock currently trades at 1.4x FY16e P/B. The bank has all the ingredients to re-rate to new generation bank valuations as it has high fees to assets (1.45% versus 1.0% for peer group), a lower unionised work force (33% as of FY14 versus 95% for peers) and higher proportion of SME and retail advances (60% of advances). This re-rating should start to play out as asset quality shows signs of stability over the next two quarters while the bank continues to deliver strong operational performance.
Building upon the momentum of Q1FY15, ING Vysya delivered another operationally strong quarterly result with the bank delivering superior results on several key parameters — strong growth momentum, stable core NIMs, improving liabilities franchise, strong customer acquisition continues, strong core fee income growth and improving distribution.
While the management has guided for a slowdown in the pace of fresh slippages in H2FY15, the guidance on restructuring still remains cautious with visibility on restructuring pipeline for the next couple of quarters. The key problem area of emerging corporate segment (mid-corporate) has been cut to c.10% of advances from c.20% in FY11 which gives us comfort on management guidance. We believe the concerns around asset quality should start to subside as asset quality stabilizes over the course of next couple of quarters.
By Espirito Santo