ICICI Securities: Recommend Jammu & Kashmir Bank

Company Background

J&K Bank plays a major role in supporting J&K’s economy through its two-pronged business approach. The bank operates as a universal bank in J&K and focuses on specialised lending in the rest of the country. With a 53% stake owned by the Jammu and Kashmir government, it is the sole banker to the J&K government. It is also the only private sector bank designated as RBI’s agent for the banking business and carries out the banking business of the central government besides collecting central taxes for CBDT. The bank saw a consolidation phase from FY06-09 undergoing business process reengineering (BPR) and revamping its operations leading to a 14% CAGR in its asset base with deposits and advances growth of 14% and 11% CAGR, respectively over FY07-10.

Impressive business profile

The bank scored well in Q1FY11 with deposits and advances rising 19.8% and 11.7% YoY to `37629 crore and ` 23035 crore, respectively, high NII growth of 40% YoY and PAT surging 23% YoY to ` 145 crore. The bank has maintained a strong CASA base of 37.8% in Q1FY11 with 539 branches in Q1FY11. Ahead of industry NIM at 3.7% and extensive provisions covering GNPA ratio of 1.92% making NNPA negligible at 0.03% augur well for the bank. We believe the strong performance on these fronts will continue.

Improving returns a positive for the bank

The bank has consistently delivered RoA in the range of 1.1-1.2% since FY08 with Q1FY11 RoA even higher at 1.34%. RoE has gained from 16% in FY08 to current levels of 18.9% in Q1FY11.

Search for new CEO, current situation in J&K cause for concern.

The bank has asked the RBI to appoint its CEO after the exit of Chairman Haseeb Drabu, who oversaw the bank’s growth since FY06. Moreover, the recent socio-political conditions in J&K will have a negative impact on J&K’s economy. We believe these issues will remain an overhang on the bank’s performance.

Valuation

At the CMP of ` 816, the bank is trading at 1.1x its FY11E BV. The bank continues to do well with consistent business growth, healthy asset quality and improving returns. However, socio-political conditions in J&K remain an overhang on the bank’s performance. Hence, we have valued the bank at 1.2x FY11E BV and arrived at a target price of ` 897.6. We have not considered its 14% MetLife stake that would offer further upside.