India Ratings

 India Ratings Affirms ING Vysya at 

‘IND AA-’ 

India Ratings-Mumbai-3 December 2012: India Ratings has affirmed ING Vysya Bank’s Long-Term Issuer rating at ‘IND AA-’ with a Stable Outlook. The agency has also affirmed the bank’s INR3.9bn lower Tier 2 subordinated debt at ‘IND AA-’.

The ratings reflect ING Vysya’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 (ING; Fitch Ratings Viability Rating: ‘a’) 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 currently adequate. However, the bank will need to raise capital regularly to support its above-system-average growth targets. The bank raised INR9.7bn of equity capital in FY12 through a qualified institutional placement, in which its parent participated to the extent of its 44% shareholding. ING Vysya reported a Tier 1 capital ratio of 11.23% at end-FY12 (FY11: 9.36%).

Asset quality has improved over the two years ending H1FY13. Gross non-performing assets (NPA) ratio declined to 1.90% at end-H1FY13 (FY12:1.92%, FY11: 2.30%), aided by lower NPA additions (FY12: 0.7% of average loans; FY11: 1.1%) and fewer slippages from the low stock of restructured loans (H1FY13: 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 (FY12: 91%) would help cushion any immediate spikes in delinquencies especially from its SME portfolio.

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 (H1FY13: 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.

ING Vysya’s low-cost current and savings accounts (CASA) deposits ratio is moderate (32.8% of total deposits at end-H1FY13), although this is the highest among peer private banks in the ‘IND AA’ rating category. The CASA deposits ratio could see an improvement in the near-term, with the expected softening of term deposit rates. The bank’s liquidity duration profile of assets and liabilities is well matched.

Profitability (return on average assets: H1FY13: 1.18%, FY12: 1.08%), although improving, is relatively weak when compared with peer private banks with similar ratings, constrained by high operating expenses.

A positive rating action could result from a significant and sustained improvement in the bank’s profitability and franchise, while maintaining stable asset quality and adequate capital ratios. A negative rating action could result from any weakening linkage with the parent, including lack of timely infusion of capital or access to risk management systems, together with a significant deterioration in ING Vysya’s capitalisation, competitiveness and asset quality.

The bank’s lower Tier 2 subordinated bonds have been rated at the same level as its Long-Term Issuer rating based on India Ratings’ ‘Rating of Bank Legacy Hybrids and Sub-Debt’ criteria dated 12 September 2012.