A Study Of Ing Vysya Bank

Published Date: 02 Nov 2017

Financial analysis of the bank

Part 2

Sourav Dutta

[This document aims at providing a financial analysis of ING Vysya bank and represents a SWOT analysis of the bank. This project is divided in two parts, this is the second.

Disclaimer: this document relies solely on the ‘public’ information published by the bank ]

Executive summary

This paper analyses the financial health of ING Vysya Bank limited in the context of its business landscape and all stakeholders. This paper takes the 81st annual report of the bank and analyses the performance. IVBL reported a capital growth and an enhanced CAR would adequately support the short term growth of the bank. It has immense possibility to partner with the growth of Indian economy by partnering with both consumer banking and funding the SMEs. The efficient corporate governance structure and an operational accounting information system aids to the banks sustained growth. IVBL is committed towards its corporate social responsibility and gets engaged with small scale industries and self-help-group in rural India to take part in development. This document emphasizes on the need of expansion of its portfolio value and customer base among the rural areas. Enhancement of its service offering to cater for the changing needs of customers is needed and towards this the global ING expertise in financial management could be leveraged here.

Table of Contents

1 Accounting Function in IVBL 5

1.1Organisation Background 5

1.2Stakeholders 6

1.3Key Resources 6

1.4Corporate Governance 7

1.5 Role of Accounting and its effectiveness 7

1.6Accounting software 8

1.7Accountants’ interaction with stakeholders 9

2 Financial Accounting Analysis of IVBL 10

1.8Analysis of Financial Health 10

1.8.1Financial Ratio Analysis 10

1.8.2Comparison with Industry-benchmark 10

1.8.3Various user-groups of financial-statements 10

1.8.4Other qualitative factors and resource management 10

1.8.5Audit report 10

1.9Corporate Social Responsibility 10

3 Management Accounting Analysis of IVBL 12

1.10Structured Management Account system [MA] 12

1.11Functioning of Budgeting system 12

1.12Budget Variance Analysis 12

1.13Costing structure 12

1.13.1How prices are calculated 12

1.13.2BEP analysis 12

1.13.3Usefulness of ABC 12

1.14Effectiveness of MA system 12

4 Financial Management Analysis of IVBL 13

1.15Financial Management strategies 13

1.16Capital Budgeting Functioning 13

1.17Capital Project Financing 13

1.18Capital Rationing 13

1.19Efficiency of Financial Management system 13

13

5 Conclusions and SWOT Analysis of IVBL 14

5.1 SWOT Analysis 14

5.2 Corporate Governance Structure and CSR 14

5.2.1 Effectiveness of Corporate Governance Structure 15

5.2.2 Actions towards CSR 15

5.2.3 Opportunities for improvement 16

5.3 Recommendations 16

Accounting Function in IVBL

IVBL is a premier private-sector bank, catering for 2 million customers with retail and wholesale banking-platforms in India. Since its formation in 2002 it combines the 80 years of Vysya expertise and ING’s global financial expertise. A brand equity survey listed IVBL among top-5 most-trusted brands in India (ET, 2012).

Organisation Background

Founded in 1930 Vysya-bank originally focused in trading with a targeted wealthy community [Vysya or traders] of South-India. After independence of India the RBI has authorized it as nationalized b-grade bank in 1972. In 1995 Vysya-bank first formed a strategic partnership with BBL, the Belgian bank. While in 1998 ING group acquired BBL, all the BBL’s joint venture started shifting to the ING group. Vysya-bank first started as a partner in distributing life insurance products of ING in 1999. In 2002 the RBI and Vysya; bank’s directors agreed the formal merger with the ING group, thus allowing ING to increase their equity holdings in the Vysya-bank from 20% to 44%.

ING group on the other hand has been in the fortune-500 list in 2012 as the world’s largest banking, insurance and financial service provider. ING, formed in 1881 and headquartered in Amsterdam is the Dutch member of the EU banking consortium. Over the time ING had made several overseas acquisitions and established its global footprint. During 2008 ING faced severe financial-crisis and Dutch government has granted a 10 billion euro capital-injection to revitalize the bank. In 2011-12 as per the Dutch law they have separated their banking and insurance business.

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Stakeholders

Business doesn’t occur in vacuum, the business-landscape is important (Parry et al, 2007)- stakeholder theory (Donaldson and Preston, 1995) emphasizes on adequate association and consideration of all stakeholders; in the environment in which it operates – not only the shareholders’ interest, during strategy-making. Considering IVBL we see various stakeholders and their interests, - investors, shareholders, Indian employees and customers, government-agencies, social-groups and media. The Dutch-organisation is targeting emerging countries [e.g. India, China] as their major operation expansion and hence they require a local Bank to collaborate with and enter into Indian market, until recently Indian banking-domain wasn’t open for foreign banks. Considering the economic-growth of Indian market, to which ING-group can offer its wide variety of products been the driver for Dutch stakeholders. Vysysa bank on the other hand to expand its operation and to emerge from a b-grade, regional bank to a widely reputed bank needed some foreign injection – in the form of both tangible [finance] as well as tacit [expertise]. Shareholders [both Indian and Dutch] are benefitted by this merger as the share price of IVBL increases as their operation volume expands. Government would be benefitted by the overall social development caused by the expansion of banks- new branches means new employment.

Key Resources

Resources of a firm could be tangible, physical/financial assets, and intangible - technology, human and brand-value. A firm's resources include its tangible and intangible resources, which it uses to develop, and deliver products/ services to its customers (Barney, 1995). RBV combines the analysis of firm’s internal resources and an analysis of the external business landscape in which it operates (Collis & Montgomery, 2008). A VRIO analysis identifies its key-resources –

Valuable- Efficiency, quality of work, innovation, and customer responsiveness are the core building-blocks of any firm, especially in banking domain. If a resource contributes towards any of these four aspects then it is valuable. Vysya groups’ eight-decade long image and the global ING group’s reputation in offering financial services, once combined, establishes the solid footprint for IVBL in Indian banking domain.

Rare- Resource is rare if competitors don’t possess it. Strategically valuable resource can’t be easily substituted. The financial expertise of ING group is its ‘rare’ resource

Inimitable- the corporate organisation structure and routines are the inimitable assets for IVBL. The global experience of banking values, practices are unachievable.

Organisation- Resources alone can’t provide a firm sustained strategic advantage; to fully enjoy and gain from its potential firm needs to be adequately organized to exploit its resources/capabilities Strong Corporate organisation and strategy could be seen as IVBL advantage.

Corporate Governance

Corporate governance committee [CGC] is effective to develop, implement and review of practices/policies. It ensures the governance-framework is effectively functioning. A crucial aspect of their work involves – monitoring to ensure that interests of all the stakeholders [shareholders, customers, employees, and the community/society] are served properly, aligned with stakeholder’s theory of Donaldson and Preston (1995), to which ING-group is committed to. Being dedicated to maintain high level transparency and business ethics IVBL success implements ACB to review the periodical financial-statements before submission to the Board and to oversee the financial-reporting process to ensure transparency, sufficiency, fairness and credibility of information to meet various user-groups’ needs. Investors committee oversees the investor’s interest.

IVBL has provisioned an effective credit risk management [CRM] structure inherited from its Dutch-origin, customised to Indian-market. CRM owns and manages credit-risk through Policies, Processes and Controls, within the guideline issued by RBI. CRO owns this responsibility. IVBL is committed to transparency in its operations and each year submits the Annual Environmental and Social Performance Report in the AGM.

Established accounting system complies with GAAP (India) and other accounting standards issued by RBI, ICAI. Foreign exchange transactions are managed and reported [in the balance-sheet] as per FEDAI norms.

Role of Accounting and its effectiveness

Accounting is necessary in any business for multiple factors – as an aid to informed decision-making, to establish targets and controls, to evaluate performance, to satisfy varying need of stakeholders [both internal and external] (Atrill & Mclaney, 2011). Within ING-group accounting is treated as a service towards business and senior management emphasizes this information system should be relevant, reliable, comparable and understandable. Both management-accounting and financial-accounting are operational in IVBL, and treated as a service that indentifies and captures relevant information, record it, analyse and report in a manner that fulfills varying needs of different user-groups, Atrill & McLaney (ibid).

Accounting software

IVBL, committed to provide its customers the state-of-the-art service, utilizes the industry-best software- Oracle is used for DWH, Business Objects for reports and foundation, Siebel for sales and services, SAP modules [FICO, CML, CMS, BP and BW] for accounting purpose and core-banking apps like BANCS and Finacle.

Accountants’ interaction with stakeholders

Accountants in IVBL interact with senior-management in forward-planning of the business. A close cooperation exists among various departments integrated with organisation’s mission statement, in which accountants interact with various levels of internal stakeholders. In the AGM they communicate with external stakeholders. On need basis accountants’ liaison with RBI.

Financial Accounting Analysis of IVBL

Analysis of Financial Health

100

http://www.moneycontrol.com/company-facts/ingvysyabank/dividends/ING#ING

Financial Ratio Analysis

250

http://www.moneycontrol.com/financials/ingvysyabank/ratios/ING#ING

Comparison with Industry-benchmark

100

http://www.moneycontrol.com/competition/ingvysyabank/comparison/ING#ING

http://www.moneycontrol.com/stocks/marketstats/indcomp.php?optex=BSE&indcode=Banks%20-%20Private%20Sector

http://economictimes.indiatimes.com/ing-vysya-bank-ltd/quotecompare/companyid-12250.cms

Various user-groups of financial-statements

200

Other qualitative factors and resource management

100

Audit report

IVBL regularly conduct external audit on its P&L account, Balance-sheet and the Cash-flow statement, by the reputed firm BSR & Co, who concludes that all relevant accounting standards are practiced and reported duly by the bank. Adequate and transparent information was made available to auditors and no irregularities reported.

Corporate Social Responsibility

200

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Management Accounting Analysis of IVBL

100

Structured Management Account system [MA]

100

Functioning of Budgeting system

150

Budget Variance Analysis

100

Costing structure

100

How prices are calculated

100

BEP analysis

100

Usefulness of ABC

100

Effectiveness of MA system

100

.

Financial Management Analysis of IVBL

40

Financial Management strategies

200

Capital Budgeting Functioning

200

Capital Project Financing

200

http://www.moneycontrol.com/financials/ingvysyabank/capital-structure/ING#ING

Capital Rationing

200

Efficiency of Financial Management system

160

Conclusions and SWOT Analysis of IVBL

SWOT Analysis

Strength - IVBL has adequate CAR to support near term growth. The capital raising initiatives taken by the bank has increased its CAR from 11,7% in FY08 to 14,47 % in FY09 which is higher than the RBI requirement [9%]. IVBL in a healthy position to benefit from the credit growth by increasing its loan book and it has targeted loan growth on a higher scale compared to the industry. It’s NPA reported a steady decline from 5% during FY05 to 1,9% during FY09, which is a healthy trend for a bank. The management is advised to maintain an appropriate combination of corporate and retail portfolio to ensure growth with minimum risk.

Weakness – compared to key players in Indian-market IVBL is considered a small regional operator, they have to invest to enhance their portfolio value and to reach more customers – especially in north/east Indian rural-population.

Opportunities - IVBL need to improve its CASA and NIM ratios in future. They have invested in expanding their branches which will increase penetration in more urban and rural areas, this intern would increase the CASA which leads to an increased NIM for the bank.

Threat - slow economic growth in Indian market pose a risk to IVBL which might significantly affect growth and may result in IVBL failing to achieve its target

Corporate Governance Structure and CSR

ING committed to good corporate governance to maintain careful balance between the short-term and long-term interests of the firm. IVBL boasts of having a transparent corporate governance structure which does justice to the interests of all its stakeholders, (IVBL, 2013). IVBL deploys a two-tier board structure consisting of the Executive Board which is responsible for day-to-day business management and strategic-planning and the Supervisory Board, which is responsible for manage performance and advise the executive board. IVBL is committed towards positive contribution to development and growth of its business landscape. Few key initiatives form IVBL towards this are - promoting education to underprivileged children, water-harvesting projects in villages in desert. Its contribution and active participation in restoring normalcy in the Tsunami-hit area during 2004 is significant. IVBL is committed towards growth of SSI. IVBL encourages its employees to get involved with these initiatives, to make sound project-plans and funding is raised from like-minded firms.

Effectiveness of Corporate Governance Structure

It is believed in ING that the two-tier structure is efficient to instill proper check and balance in the firm and to meet the varying need of all stakeholders. The management team comprises of both international expertise and geographical presence which combined provides IVBL an edge over its other local competitors, by combining rich global ING financial expertise customized to Indian market. IVBL deploys both internal audit by it’s CAS team and the external audit, audit findings are reported in the AGM. Shareholders have their voting rights and the right to appoint [or dismiss] executive and supervisory board members. Criteria for appointment and renewal of directors are clearly described in the annual report. IVBL emphasizes on the utmost importance of Board meetings – all future meetings are well planned and participation is guaranteed. IVBL has three layers of internal control e.g. business-unit, risk-management and CAS. IVBL committed to financial transparency and Basel-II pillar3 disclosure.

Actions towards CSR

IVBL ensures that projects undertaken are environmentally and socially sound and sustainable and it is effectively practicing the G-ESR policy. IVBL is traditionally focused on SME and SSI; not only by lending but by nurturing firms, aiding in developing solid business proposals and partnering. SME portfolio reported an increase of 36% during FY12. IVBL has made a network of 86 rural branches to cater for agricultural and rural needs. Bank offers small scale loans on poultry, dairy etc which helps the self-help groups in rural India. IVF is engaged alongwith NGOs, state-governments and Unicef to community literacy programs, providing education to slum dwellers and visually impaired students, development plans for rescued child-labors and kids from red-light areas. IVF runs a portal to educate children on nature and environmental-causes. IVBL reported a 13% savings on energy-costs during FY12 and successfully implemented a project which deploys 100 eco-friendly kitchens to rural-area.

Opportunities for improvement

IVBL initially faced several issues – lack of adequate risk management systems, financial reporting and quality of resources; compared to its peers. The business of IVBL experienced a slow pace, at a CAGR of 17% during past 5 years, which is much less compared to Indian banking industry growth 24%. IVBL had difficulties to implement core-banking platform and portfolio-value creation among the Indian landscape. Currently bank operates with 460 branches and 357 ATM machines. India and China are ING group’s core market for growth of its banking business in Asia; hence IVBL enjoys strong support from parent group. Cost to income ratio is relatively high 59% for IVBL compared to equal-sized peers; Yes-Bank has this ratio as 38,3%. Business per employee for IVBL is Rs 6,7 crore as compared to Rs 10,7 crore in Yes-Bank. The loan-book of IVBL is well-diversified with whole-sale banking at 44%. Bank need to ensure more savings deposit and improve the CASA ratio.

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Recommendations

Concentration of exposures- twenty largest borrowers contributes to 12,55% of bank’s total loans; IVBL should work on to reduce this figure to below 10%

To reduce the non performing investments; such assets should be sold

Keep the loan assets which are subject to restructuring to a minimum,

Sector-wise NPA breakdown indicates personal loans attributes to almost 50% of total such assets while SMI and agriculture is at 2% each, IVBL should focus to fund more agricultural and SMI projects in rural areas [by engaging with self-help groups] and ensure personal-loans are adequately mortgaged.

More engagement in booming-sectors like capital-market and real-estate

Bank has reported adequate CAR [at 14%] to support growth, though reported a growth of 15% in CASA , they have room for improvement considering the huge Indian-market- they need to expand their operations in rural areas. Currently the branches are mostly [83%] in urban areas this blocks the bank’s opportunity to grab the rural population.

Expand and engage with agricultural and rural population and funding SMEs

Diversify and make provisions of single-window facility for consumer loans [e.g. housing, education loan]

Diversify its online portal and provide a wide-array of services to consumers – e.g. securities-trading, life-insurance, paying premiums, tax-saver investment offers