Monday, April 12, 2010


Building blocks in place; growth set to accelerate
Preferring prudence over balance sheet growth, VYSB consciously slowed down its asset growth. Now, with a sizeable branch network, receding asset quality concerns (with rundown in unsecured portfolio) and strong capital position, coupled with the able guidance of Mr. Shailendra Bhandari, the bank expects to switch from consolidation to growth mode. The bank’s return of confidence reflects in its 7% Q-o-Q growth in Q3FY10. Loan growth is expected to track industry run-rate over a few more quarters before the bank ups the ante and gains market share.

Asset quality slippages to peak by Q4FY10
Deterioration in the asset quality over the past few quarters was owing to VYSB’s conservative restructuring policy and also slippages from the unsecured loan book. Slippages are expected to remain high till Q4FY10, post which they will decline significantly given the rundown in unsecured loan book. Loan loss provisions are likely to remain at elevated levels with a downward bias for a few quarters, to meet 70% coverage norm by Q2FY11.

■ Cost–to-income ratio to move closer to 50%
Cost–to-income ratio has come off to 58% in Q3FY10 from 66% in FY09. With the traction in income and productivity gains, cost-income ratio could lower further to 50% over the next two years. Over the next 3-5 years, with improvement in productivity, cost-to-income will reach the mid 40 levels.

Outlook and valuations: Shifting gears; maintain ‘BUY’
With return of growth, and decline in opex ratio and credit costs, earnings over the next two years are expected to post 27% CAGR. This will push ROA to closer to 1% by FY12E. This, together with better leverage of 14-15x, will drive ROEs to 14-15%. At CMP, the stock is trading at 1.3x FY12 book and 8.4x earnings. We maintain ‘BUY’ on the stock and rate it ‘Sector Outperformer’ on relative basis.

To read the full report: ING VYSYA BANK