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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.
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.
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.
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 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).
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
Financial ratios serve the purpose of analyzing the financial health of a business, a ratio is beneficial in comparing firm's data with its peers or industry-benchmark to evaluate how business performs with respect to market-standard, or to compare firm's data from previous financial years to analyse how business is improving [or not], Atrill, McLaney (ibid). This could hence acts as a control to measure planned performance. Ratios though represent financial strengths [and weakness of business but alone themselves can't explain the reason. Various stakeholders are interested in various ratios- e.g. shareholder will be interested about profitability ratios (ROA, NPM), a short-term lender considers liquidity ratios (dividend pay-out, current-ratio).
Financial Ratio Analysis
We use ratios to compare of IVBL performance during FY11-12 against FY10-11, referring Table-1, significant highlights are -
Bank has reported a significant 15% increase in CASA deposit, a higher CASA indicates that bank is having inflow of cash at a lower cost as no interest is paid on the current account and interest paid on savings is also much low.
A decrease [3%] in Cost-to-Income ratio indicates bank is performing well as it managed to spend less cash to generate income
A 20% increase in NII compared to its previous results indicates effective functioning of its monitoring and management system [around income and operating expenses]
EPS has been increased which is a positive indication for both current and future investors.
A higher, Quick-ratio [at 15.28] than previous result indicates bank is more capable to utilize its liquid cash or cash-equivalents to meet liabilities
IVBL made slight improvement in its current-ratio, indicating firm has enough resources to pay its debts in current financial-year.
Return-on-net-worth is slightly less compared to previous result, but not worrying.
Asset-turnover ratio remains almost the same which indicates a positive sign as it indicates that efficiency of IVBL to use its assets to generate revenue/income for itself.
Bank has increased its NPM - which indicates of its effective governance and organisational routine
An increase of adjusted cash-margin indicates presence of adequate cash-flow to meet its needs
A 43% increase of PAT, demonstrating financial-strength of IVBL
Comparison with Industry-benchmark
Let's compare financials with its peers, considering a Leading-bank [e.g. HDFC], and a similar-sized bank [e.g. Yes-Bank, Kotak-Mahindra].
Table-2 indicates March-2012 figures (ET, 2012); IVBL reports a higher EPS than its similar-sized peer; PPE of IVBL is much better than its competitors which would be a positive sign for future investors.
Table-3 shows a comparison from its financial statements perspectives (ET, 2012) as on March-2012. We see that IVBL reported a positive net cash-flow which is much better than its competitors; also it announced a sizable dividend.
Various user-groups of financial-statements
Financial statements have got several user-groups, having varying information-need from these, Atrill, McLaney (ibid). User-groups, further, could be internal [management, employee], external [shareholders, investors, government].
Investors concerned about 'investment valuation' figures [dividend-per-share] which would aid them to evaluate firm's status to guarantee their investment is safe and would generating revenue
Management eager for 'management efficiency' ratios [asset-turnover ratio] to aid in day-to-day decision-making and evaluating performance against industry-benchmark and peers.
Government bodies look for audited annual reports to ensure IVBL complies with all RBI regulations and performs reporting adequately, to ensure no fraudulent activity is happening and investors' money is safely managed
Lenders would be concerned about profitability ratios and leverage ratios which indicate firm's performance [and credit worthiness]. This reputation enhances future engagement of them with IVBL.
Employees and labor-unions - cash-flow and leverage ratios to indicate bank's performance by comparing with peers. It also indicates that bank has adequate fund to pay wages and future growth, pension and other facilities.
End-consumers - investment valuation and profitability ratios are of much importance. Dividend per share, face-value, operating profit per share etc portrays financial-health of the bank and enhances portfolio-value of the bank, which attracts further customer.
Auditors - adequacy in available information, relevance, and correctness of figures is of utmost importance for auditors who based on these evaluate the completeness and transparency of accounting process against predefined industry and regulatory standards.
Other qualitative factors and resource management
IVBL reported FY12 a Total-Income-per-Capital-Employed of 10.55% which is higher than FY11 but at the same time it reported a decline in business-per-employee - from 67,479 in FY11 to 55,977 in FY-12, which shows the rise in effectiveness. IVBL has taken Induction programme for sales teams. Employees were trained on Compliance, Product features and basics of selling skills. Rewards and recognition events were organized for performing employees. Amidst the recent forecast from RBI on the higher attrition rate in Indian Banking-domain IVBL need to take steps to retain its valuable human-resource. The recent introduction of fone-a-career scheme might become attractive to fresh-professionals.
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 - CSR
IVBL is dedicated towards respecting values of its business-landscape and partnering in its growth. CSR performance of IVBL includes-
Engagement with 12 NGOs via IVF, aiming to promote primary education to underprivileged children
Financial literacy program for youths living in slums
Hope-brigade program in which IVBL employees volunteer in various activities like - educating kids, developing project proposal for SSI, accounting training for future-entrepreneurs
Rural-development and self-employment training courses, approx 3000 youth were benefitted in FY12
Towards sustainability development, IVBL practices equator-principles [EP], which is a set of voluntary environmental and social guidelines, set by IFC and WB (IVBL AR, 2012)
Towards energy-conservation, IVBL demonstrated its commitment by saving 670,000 units of energy during FY12 (IVBL AR, 2012)
Towards its commitment for SSI, IVBL waives any processing fee up to a credit limit of Rs. 5,00,000.00 and enabling pre-payment without any penalty. While a SSI-unit becomes sick IVBL offers a debt-restructuring program to nurse those sick-units.
Management Accounting Analysis of IVBL
Management accounting is a valuable instrument for a firm and its internal stakeholders [especially management] to aid in their day-to-day decision-making, Atrill & McLaney (ibid). Managers depend on this several figures, which are mostly confidential information like sales forecasting, wages, labor-hours, feasibility-study, merger reports, containing both physical and financial data. IVBL is segregated into various business units [BU] and each BU-head is responsible for managing this data or his/her unit, once consolidated this report is been audited by CAS [internal-auditors] and reported to higher-management. Full-costing is in use effectively to decide on pricing, exercise control and evaluating efficiency and performance.
Structured Management Account system [MA]
We identify the extent of effective management-accounting practices in IVBL, considering the features, like - budgetary-control, CVP-analysis, different types of costing, total-quality-management, value-chain analysis and product life-cycle analysis, benchmarking, profitability analysis and shareholder value analysis. The business-landscape is dynamic in nature and hence it is critical to ensure an appropriate MA system is being evolved over-time. an effective MA system aids to better conduct business activities by providing management appropriate and adequate information to aid decision-making. This ultimately enhances performance. If the MA practiced is inadequate or inappropriate with organisation-structure and its business-landscape, it may lead to complete failure of business.
Functioning of Budgeting system
A budget is a business-plan for short-term - usually one-year, Atrill & McLaney (ibid), it converts the firm's strategic objectives into short-term achievable plans/targets. In IVBL the budget system translates the ING-group mission to tangible pieces-of-plans for each BU and acts as a control mechanism to evaluate effectiveness of strategies/processes. IVBL, by using Asset and Liability committee, sets the internal targets and oversee the adherence on a regular basis. Also capital adequacy is checked quarterly. In IVBL periodic-budget is set for a year for BU and departments have their own continual-budget. Department-heads prepare the budget based on activity, alongwith respective finance-dept representative, which then presented to corresponding BU-head for approval. Flex-budget is in use, conducted monthly to identify the variances. Customer-satisfaction is captured in the budget as a nonfinancial yet crucial element. Balanced-scorecard is used across BUs to measure customer satisfaction, learning and growth of BU staffs, and financial achievements.
Budget Variance Analysis
While using budget as a control-mechanism variances are crucial- this could be of two types- adverse-variance, which is a negative difference between actual and planned, causing a concern for management as it reduces profit; favorable-variance where a positive difference enhances profit than expected/budgeted, Atrill & McLaney (ibid). Factors that contribute to IVBL's budget-variance are -the dynamic banking-domain in India, inflation, foreign-exchange rate fluctuations, volatility of customer-choice. Volume of activity is crucial towards profitability, to reach the break-even-point bank needs to ensure adequate customer-engagement, which enhances CASA ratio which means bank has more money at much lesser cost incurred.
Traditional full-costing method is in use in IVBL, which aids management to decide on the fees for customers for the provided service, to exercise controls to ensure operations are within the range budgeted, and evaluate performance of BUs. Each BU has direct-cost [e.g. infrastructure like office, ATM-unit, data-centre, salary, marketing] and in-direct costs [e.g. R&D, IT, vendors]. Fixed-cost of a BU includes its premises-rent, marketing, R&D and staff-salary; variable cost includes vendor cost for IT-support, banking-device costs [e.g. debit-card issuance cost, handheld-device cost]. It is recommended that IVBL being a multi-product business an activity-based costing might be beneficial in future.
How prices are calculated
Following are three key aspects considered -
Banking products/services are identified based on market-analysis and historical-trend
Customer-volume is estimated based on historical-data and market-trend
Cost for these products/services are calculated for the anticipated customer-volume
Fixed cost- Current infrastructure [datacenter, ATM centres, office-premises, front and back offices] is treated as fixed cost. Following contributes to an increase in fixed-cost - introduction of new branches, ATM centres, capacity enhancement for datacenters to cater for additional customer-number.
Variable cost includes - infrastructure cost for new customers including - banking instruments [checque-book, debit-card, authentication-device], additional vendor-hour and BPO-cost to support enhanced volume of customers.
Volume of activity [customer-volume] is the lifeline of business, if IVBL fails to arrange adequate customers it will introduces loss. CVP-analysis is conducted considering all costs [fixed and variable] of a firm to determine the ideal volume of operational activity which ensures business to meet all its expenses incurred to earn the revenue, Atrill & McLaney (ibid). That point of activity is refer as BEP and illustrates the ideal operational volume to avoid any loss. Normally IVBL should keep a margin-of-safety to enhance its risk-tolerance, adding this to BEP gives the load-factor which is the optimal operational-situation for the Bank.
Usefulness of ABC
Activity-based costing is a technique to accurately calculate cost of a service, associating all overhead costs, which are caused by activities [customer-volume], for IVBL such costs could be vendor-hour to support IT, back-office staff for support customer-care, stationery and debit-card, ATM-equipment costs. ABC is concerned about the way [proportion] various overhead-components attribute towards the total cost, Atrill & McLaney (ibid). IVBL should use this method for accurate costing considering all attributes. They should employ the overhead cost-pool per cost-driver, that accumulates all costs incurred for that head [e.g. IT-support cost], accumulating all such cost-pools associated with all cost-drivers develop the total-cost of the service.
Effectiveness of MA system
Banking-domain is full of uncertainty, which restricts the usefulness of CVP-analysis to determine the BEP and plan accordingly. Relying solely on the CVP-analysis could be misleading, due to- a) its linear assumptions varies widely with real-life nonlinear variations, b) fixed costs aren't actually 'fixed' instead they in reality stepped, Atrill and McLaney (ibid). IVBL inherited the effective financial risk management methodologies form its Dutch-origin which is practiced efficiently to measure and manage risk-appetite of bank. Comparison of key-figures between FY11 and FY12 indicates IVBL performing steadily fulfilling its targets, which emphasizes adequate functioning of its management accounting system.
Financial Management Analysis of IVBL
Financial management exists to aid decision-making, concerning the best possible way to manage funds for the business, Atrill & McLaney (ibid). It identifies main forms of available finance, their sources, risk and cost-benefit analysis of each of these sources.
Financial Management strategies
Capital Budgeting Functioning
Capital Project Financing
Efficiency of Financial Management system
Conclusions and SWOT Analysis of IVBL
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 at a higher-rate 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 [Basel-II pillar3 disclosure] and whistle-blower policy is practiced to assist staff to raise concerns during any incident [non adherence of SOPs], protects the identity of the whistle-blower and direct access to the board.
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.
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