Stock Market Result Update on Jammu and Kashmir Bank for 1QFY2012

Stock Market Result Update on Jammu and Kashmir Bank for 1QFY2012 with a Neutral recommendation.

For 1QFY2012, J&K Bank registered healthy net profit growth of 25.4% yoy (up by strong 31.6% qoq) to `182cr, above our estimates due to lower provisioning expenses than built in by us. Stable asset quality and marginal improvement in reported NIM were the key highlights of the results. We recommend Neutral on the stock.

Asset quality remains stable; Margin shows improvement of 10bp: The bank’s loan book grew marginally by 0.8% qoq to `26,403cr; however, deposits declined by 3.6% qoq to `43,078cr. Saving deposits increased by strong 3.7% qoq; however, current deposits declined by 21.7% sequentially, leading to a marginal 9bp qoq decline in CASA ratio to 40.4%. Cost of deposits for the bank only increased by 2bp qoq to 5.4%, while yield on advances increased by 27bp qoq to 11.4%, leading to a sequential rise of 10bp in reported NIM to 3.8%. During the quarter, fee income declined by 19.1% qoq to `42cr, while treasury income declined by 55.4% qoq to `10cr. For 1QFY2012, the bank managed to maintain its asset quality with gross NPAs rising marginally by 1.8% qoq to `528cr. Net NPAs, however, rose by 9.6% qoq to `58cr in 1QFY2011. NPA coverage ratio continued to be strong at 92.5% for 1QFY2012 (92.7% in 4QFY2011). According to management, the bank has already switched over all accounts to system-based NPA recognition.

Outlook and valuation: The stock is trading at 0.9x FY2013E ABV vis-à-vis its historic range of 0.8–1.4x and five-year median of 1.02x. Also, immediate levers in the form of increased CD ratio from the current low 61.3% into higher yielding advances are likely to provide near-term higher momentum to NII growth for the bank relative to other mid-size banks. Further, with 40.4% CASA ratio, the bank is more favourably placed than its peers to handle NIM pressures from high deposit rates. However, the stock has already outperformed other mid-size PSU banks significantly in the last six months and in relative terms we believe the premium at which it is trading to other mid-size PSU banks adequately reflects the positive outlook for the bank. Hence, we recommend a Neutral rating on the stock.

Result Update on Jammu and Kashmir Bank for 4QFY2011

For 4QFY2011, J&K Bank registered healthy net profit growth of 15.4% yoy (down 17.5% qoq) to `139cr, in line with our estimates. Healthy credit growth (after adjusting for repayment of `2,300cr by the state government) and marginal improvement in reported NIM were the key highlights of the result.
We recommend an Accumulate rating on the stock.

Healthy credit growth momentum, improving NIM and robust asset quality: For 4QFY2011, deposit growth was strong at 9.3% qoq, while advances growth was slower at 3.3% qoq. However, the bank closed down the overdraft facility to the J&K government worth `2,300cr during the quarter. Adjusted for this change, qoq growth in advances would have been significantly higher at 12.3% (23.6% yoy instead of 13.6% yoy). The bank also managed to grow its CASA deposits by 11.8% qoq (19.4% yoy), leading to a 91bp improvement in CASA ratio to 40.5%. For 4QFY2011, the cost of deposits increased by 24bp to 5.4%. Due to change in asset mix, the yield on investments dipped by 24bp to 6.3%, while yield on advances witnessed an increase of 44bp to 11.2%, leading to reported NIM remaining flat at 3.7%. The bank managed to maintain its asset quality in 4QFY2011 with gross NPAs rising marginally by 3.0% qoq to `519cr. Net NPAs, however, jumped five times on a low base from `11cr in 3QFY2011 to `53cr in 4QFY2011 due to lower NPA coverage ratio of 92.7% for 4QFY2011 compared to 98.4% for 3QFY2011. Operating expenses grew by 28.2% qoq as the bank provided fully for pension and gratuity expenses amounting to `91cr during the quarter.

Outlook and valuation: The stock is trading at 0.9x FY2013E ABV vis-à-vis its historic range of 0.8–1.4x and five-year median of 1.04x. We maintain a positive view on the stock, considering the bank's strong deposit mix, dominant regional market share and healthy track record in asset quality. We believe this provides sufficient margin of safety from the risks of political disturbances in J&K, especially in light of the bank's steady performance even during past crises. Even taking into account the inherently lower-than-national average growth (in GDP, deposits and credit) in J&K, at just 0.9x FY2013E P/ABV and with sustainable RoEs of at least 16%, the stock is inexpensive. Hence, we recommend Accumulate on the stock with a target price of `885, implying an upside of 10.7% from current levels.