ING Vysya Bank, the Bangalore-based private sector lender, will need to raise capital regularly to support its above-system-average growth targets, according to credit rating firm India Ratings.
ING Vysya Bank raised Rs 970 crore of equity capital during FY 12 through a QIP, in which its parent participated to the extent of its 44% shareholding. The bank has reported a Tier I capital ratio of 11.23% at the end of FY 12.
The rating agency has given a stable outlook for the bank's Rs 390 crore lower Tier 2 subordinate debt, taking in view the lender's adequate capital position, improving asset quality and moderate funding profile.
"The ratings also factor in the bank’s relatively weak (although improving) profitability and relatively high proportion of loans to the traditionally volatile SME sector. While the ratings factor in the benefits to the bank’s franchise and systems/processes from its linkages with its parent ING Bank NV under the ordinary course of business, the ratings are not driven by expectations of support from ING Bank NV/ING Group," the rating agency highlighted.
The asset quality of ING Vysya has improved over the two years ending H1 FY 13. Gross non-performing assets (NPA) ratio declined to 1.90% at end-H1 FY 13 (FY 12:1.92%, FY 11: 2.30%), aided by lower NPA additions (FY 12: 0.7% of average loans; FY 11: 1.1%) and fewer slippages from the low stock of restructured loans (H1 FY 13: restructured were 1.4% of total loans).
"Given the moderating economic environment and the bank’s focus on growing its SME portfolio, asset quality could come under pressure in the near-to-medium term. The bank’s high provision coverage ratio (FY 12: 91%) would help cushion any immediate spikes in delinquencies especially from its SME portfolio," India Ratings said.
India Ratings notes that while ING Vysya’s SME portfolio as a percentage of its total loans is one of the highest in the banking system (H1 FY 13: 32.5%), the bank’s overall yields on advances are not commensurately high or in line with this high proportion.
"The portfolio has behaved well during the recent economic downturn, aided by experienced underwriting and a largely collateralised portfolio. Nevertheless, the SME sector is typically more volatile in times of economic moderation/weakening and any significant impairment in this business could impact the bank more than its peers with higher pre-provision operating profit buffers," the rating agency cautioned.
ING Vysya’s low-cost current and savings accounts (CASA) deposits ratio is moderate (32.8% of total deposits at end-H1FY13), and this ratio could see an improvement in the near-term, with the expected softening of term deposit rates.
Profitability (return on average assets: H1 FY 13: 1.18%, FY 12: 1.08%), although improving, is relatively weak when compared with peer private banks with similar ratings, constrained by high operating expenses, according to India Ratings.
