India Ratings & Research (Ind-Ra) has upgraded ING Vysya Bank's (ING Vysya) long-term issuer rating to 'AA' from 'IND AA-'. The outlook is stable. The agency has also upgraded the bank’s Rs 3.9 billion Basel II lower Tier 2 subordinated debt rating to 'AA' from 'AA-'.
The upgrade reflects an improvement in ING Vysya's credit profile as reflected in its stronger capitalisation levels and improving profitability buffers in the form of rising pre-provision operating profits (PPOP). The prevailing weak economic environment may exert pressure on the bank's loan portfolio leading to a rise in delinquencies; however, the bank’s high specific loan loss reserves and improving PPOP provide an adequate cushion to absorb increases in delinquencies and credit costs.
While ING Vysya's ratings factor in the benefits to its 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.
ING Vysya's capitalisation is healthy, with a reported common equity Tier 1 capital ratio of 14.49% at end-December 2013 (9MFY14), boosted by the injection of Rs 18.36 billion of equity capital in July 2013, in which ING participated to the extent of its 43% shareholding. Ind-Ra understands that ING Vysya is likely to maintain a higher minimum Tier 1 capital ratio (around 11%) than in the past, mainly in order to facilitate a smooth transition to the Basel III regime. ING Vysya has a track record of regularly raising equity and its current capital position is sufficient to support its above-system-average loan growth targets over the next three years.
ING Vysya's largely tangible collateral-based lending to the retail and small & medium enterprises (SME) segments have enabled it to manage its asset quality. This has also been contributed by a slowdown in lending to large corporate borrowers over the past year.
While ING Vysya's SME portfolio as a percentage of its total loans is among the highest in the Indian banking system, the bank's yields on advances in this portfolio are rising, indicating better pricing of risk. Furthermore, the portfolio quality has held up well during the economic downturn, aided by experienced underwriting and a largely collateralised portfolio. Also, ING Vysya is the sole banker for a large majority of its SME borrowers, which helps the bank to have more cash flow visibility.
The bank's overall profitability is improving, supported by a widening net interest margin and a decreasing cost/income ratio. While the cost/income ratio is still high it is converging with the peers', facilitating a rise in the PPOP margin. That said, profitability could face some pressure from a near-term increase in credit costs, especially from the bank’s emerging corporates portfolio.
ING Vysya's funding profile is average. While wholesale deposits accounted for a high 35% of total deposits at end-December 2013, the bank’s low-cost current and savings accounts deposits ratio improved to 34.7% of total deposits at 9MFY14, the highest among peer private sector banks in the 'AA' rating category, and should help ING Vysya manage its funding costs. The bank's liquidity profile exhibits well-matched asset and liability tenors.
Shares of the bank gained Rs 8.5, or 1.49%, to trade at Rs 578. The total volume of shares traded was 546 at the BSE (12.29 p.m., Wednesday).
