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For 3QFY2011, J&K Bank registered healthy net profit growth of 19.9% yoy to
`168cr, above our estimate of `121cr, primarily on account of lower-thanestimated
provisioning expenses. We were conservatively penciling in higher NPA
provisions to create a margin of safety considering the political disturbances in the
state of J&K during 9MFY2011. We maintain a Buy on the stock.
Strong credit growth momentum, improving NIM and robust asset quality:
Advances showed strong traction with growth of 9.4% qoq and 22% yoy
compared to growth of 0.6% qoq and 9.8% yoy in 2QFY2011. The CD ratio
improved to 62.1% from 58.4% as of 2QFY2011. Deposits registered healthy
growth of 21.4% yoy. Saving account deposits grew by a strong 29.6% yoy.
However, due to reduction in current account deposits overall CASA growth was
slower at 16.8% yoy. CASA ratio remained stable ~40% levels. Improvement in
CD ratio coupled with higher yield on investments and decline in cost of deposits
aided NIM expansion to 3.70% compared to 3.66% in 2QFY2011 and 3.28% in
3QFY2010. Asset quality of the bank improved further with decline in both gross
and net NPAs. Gross NPA ratio improved to 1.95% compared to 2.17% in
2QFY2011 and the net NPA ratio improved to 0.04% from 0.13% in 2QFY2011.
Outlook and Valuation: The stock is trading at 0.9x FY2012E ABV vis-à-vis its
historic range of 0.8-1.4x and median of 1.1x. We maintain our 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 that 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, credit) in J&K, at just 0.9x FY2012E P/ABV and with sustainable
RoEs of at least 17%, the stock is inexpensive. Hence, we maintain a Buy on the
Strong credit growth; multiple levers to improve it further
During 3QFY2011, the bank showed strong traction in business. Advances grew
by 9.4% qoq and 22% yoy to `25,363cr compared to growth of 0.6% qoq and
9.8% yoy in 2QFY2011. Deposits increased by 3% qoq and 21.4% yoy to
`40,877cr. The faster credit growth aided the improvement in credit-to-deposit
ratio to 62.1% from 58.4% in 2QFY2011.
The bank is likely to see repayment of loans to the tune ~`2,300cr (~9.1% of the
loan book as of 3QFY2011) from the Jammu & Kashmir state government over
the next couple of quarters. However, despite this management is confident of
achieving balance sheet growth of 20-25% in FY2012. Management has indicated
of having sanctions of ~`3,000cr that will be disbursed in 4QFY2011.
To leverage the low CD ratio, the bank plans to increase exposure outside the state
of J&K. Plans on the anvil include opening 10 branches p.a. outside the state of
J&K, in the commercial centres and in southern tier-II and tier-III cities for
increasing its advances and exploiting its specialisation in agricultural lending,
respectively.
We believe that the bank has ample headroom to grow its advances at a healthy
pace, even in the current systemic liquidity deficit scenario, given its low credit-todeposit
ratio of 62.1% as of 3QFY2011. Accordingly, we have factored in credit
growth of 18% for FY2011 and 22% for FY2012.
During 3QFY2011, total deposits of the bank grew by 21.4% yoy on the back of
strong growth in savings account deposits of 29.2% yoy. However, on account of
the 6.9% yoy decline in current account deposits, overall CASA deposits growth
was lower at 16.8% yoy. On a sequential basis, deposit growth was muted at 3%
due to coming off of current account floats (declining 16.7% qoq).
On account of relatively slower growth in CASA deposits, the bank’s CASA ratio
declined to 39.6% from 41.1% each in 2QFY2011 and 3QFY2010. However, the
bank’s CASA ratio still remains amongst the better ones in industry and is expected
to cushion NIM pressures in the current rising interest rate environment.
Out of the total deposits, ~65% is contributed by the state of J&K. Of this 65%,
~55% of the deposits comprise CASA deposits. The pace of CASA deposits
accretion in the state of J&K is expected to be maintained with the bank planning
to open ~30-40 branches p.a. in the rural areas of J&K going forward.
stock, with a Target Price of `987, implying an upside of 33% from current levels.
NIM improves due to falling cost of deposits and rising yield on
investments
Reported NIMs for 3QFY2011 improved both sequentially and on a yoy basis to
3.70% from 3.66% in 2QFY2011 and 3.28% in 3QFY2010. The sequential
expansion in NIM came on the back of the 9bp qoq fall in cost of deposits and
43bp improvement in yield on investments. Yield on advances declined
sequentially by 29bp to 10.71%. Improvement in NIMs led to a healthy 32.7% yoy
growth in net interest income (NII) to `390cr.
Going forward, the bank’s yield on advances is likely to improve on account of
utilisation of ~`2,300cr of proposed loan repayment by the J&K government
for higher yielding advances. Management is targeting to maintain a NIM of
~3.5% for 4QFY2011, which is 20bp lower than that of 3QFY2011.
Robust asset quality
The bank continued to maintain robust asset quality with gross NPAs declining by
1.7% qoq to `504cr and net NPAs dipping by 65.7% qoq to a marginal `11cr.
Consequently, the gross NPA ratio improved to 1.95% from 2.17% in 2QFY2011
and the net NPA ratio improved to 0.04% from 0.13% in 2QFY2011. Provision
coverage ratio, which was already the best in the industry, further improved to
98.4% from 95.5% in 2QFY2011. NPA provisions-to-average assets declined to
0.1% from 0.4% each in 1HFY2011 and FY2010. Management is targeting to
reduce the gross NPAs by ~`70cr in 4QFY2011.
During 3QFY2011, provisioning expenses declined by 21.1% qoq to `31cr on the
back of the substantial 61.5% qoq decline in NPA provisions compared to
2QFY2011. NPA provisions fell by 25% yoy to `15cr. Provisions for restructured
advances doubled sequentially to `6cr, but were up a moderate 14.2% yoy.
Operating expenses under control; branch expansion to pick up
Operating expenses increased 14.5% qoq and 28.7% yoy to `186cr on the back
of the 37.2% rise in employee expenses and 13.4% increase in other operating
costs. As the bank’s operating income grew at a relatively slower rate of 20% yoy,
the cost-to-income ratio increased to 39.9% (36.4% in 2QFY2011 and 37.2% in
3QFY2010).
The bank’s branch network growth has been muted over the past one year.
However, going forward the bank is planning to roll out ~40-50 branches every
year out of which 30-40 are planned in the state of Jammu & Kashmir, while ~10
branches will be opened in commercial centres and certain tier-II and III southern
cities. This planned expansion is expected to further strengthen the liability
franchise through CASA deposit accretion and better NIM on the back of
improvement in credit-to-deposit ratio.
Strong capital adequacy
The bank has strong capital adequacy with CAR of 15.5%, out of which more than
82% is tier-I component. Hence, the bank is well capitalised to grow at a healthy
pace and also has ample headroom for raising funds through tier-II components.
However, the bank’s capital adequacy is likely to decline by ~100bp due to
utilisation of the amount repaid by the J&K state government for advances with
higher risk weightage.
Investment Arguments
Well-protected loan book
Structurally the bank's credit mix has only a small portion directly exposed to credit
risks from political disturbances in J&K state. For instance, 48.5% of the bank's
`23,183cr loan book as of 1HFY2011 is outside the state of Jammu & Kashmir, of
which 60% is to corporates. Further, ~40% of J&K lending has almost no risk
attached to it, being lent to the state government and its employees. The
repayment of state government loans is also likely to be deployed in high rated
corporates outside J&K. Only 17% of the total loans are in the relatively sensitive
Kashmir valley region, large portion of which is to the healthy horticulture and
trade sectors, which see minimal disruption even during strikes due to essential
linkages with rest of the country.
Robust asset quality
Over the years, the bank has maintained robust asset quality, with the best-inindustry
provision coverage ratio of 98.4% as of 3QFY2011. Despite substantial
disturbances in 3QFY2011, the bank managed to maintain its strong track record
on the asset quality front with an actual decrease in gross NPAs. On a conservative
basis, we have factored in provisioning expenses of `67cr for 4QFY2011, which is
more than double of 3QFY2011. Moreover, being almost the sole source of
funding in the state with a credit market share of 87%, once disturbances subside,
the bank has usually seen very strong recoveries too.
Strong branch network and legacy = dominant market share
The bank has ~400 branches in J&K. Due to its strong branch network and legacy
of banking relationships, the bank has a dominant 70% market share in deposits
in J&K. CASA deposits constituted a strong 51.2% of the incremental deposits
growth from FY2004-10. This strong base of low-cost deposits is expected to
sustain one of the highest NIMs amongst mid-sized banks of 3.3-3.4%.
Attractive valuations
The stock is trading at 0.9x FY2012E ABV vis-à-vis its historic range of 0.8-1.4x
and 5-year median of 1.1x. 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 that 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, credit) in J&K, at just 0.9x FY2012E P/ABV and with sustainable
RoEs of at least 17%, the stock is still inexpensive. Moreover, immediate levers in
the form of increase in CD ratio from the current low 62.1% as well as
re-deployment of state government loans into higher yielding advances are likely
to provide near-term higher momentum to NII growth for the bank relative to other
mid-sized banks. Further, with 40% CASA ratio, the bank is also more favourably
placed than its peers to handle NIM pressures from rising deposit rates. Hence, we
maintain a Buy on the stock, with a Target Price of `987, implying an upside of
33% from current levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jammu and Kashmir Bank – 3QFY2011 Result Update
Angel Broking maintains a Buy on Jammu and Kashmir Bank with a Target Price of Rs. 987.
For 3QFY2011, J&K Bank registered healthy net profit growth of 19.9% yoy to
`168cr, above our estimate of `121cr, primarily on account of lower-thanestimated
provisioning expenses. We were conservatively penciling in higher NPA
provisions to create a margin of safety considering the political disturbances in the
state of J&K during 9MFY2011. We maintain a Buy on the stock.
Strong credit growth momentum, improving NIM and robust asset quality:
Advances showed strong traction with growth of 9.4% qoq and 22% yoy
compared to growth of 0.6% qoq and 9.8% yoy in 2QFY2011. The CD ratio
improved to 62.1% from 58.4% as of 2QFY2011. Deposits registered healthy
growth of 21.4% yoy. Saving account deposits grew by a strong 29.6% yoy.
However, due to reduction in current account deposits overall CASA growth was
slower at 16.8% yoy. CASA ratio remained stable ~40% levels. Improvement in
CD ratio coupled with higher yield on investments and decline in cost of deposits
aided NIM expansion to 3.70% compared to 3.66% in 2QFY2011 and 3.28% in
3QFY2010. Asset quality of the bank improved further with decline in both gross
and net NPAs. Gross NPA ratio improved to 1.95% compared to 2.17% in
2QFY2011 and the net NPA ratio improved to 0.04% from 0.13% in 2QFY2011.
Outlook and Valuation: The stock is trading at 0.9x FY2012E ABV vis-à-vis its
historic range of 0.8-1.4x and median of 1.1x. We maintain our 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 that 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, credit) in J&K, at just 0.9x FY2012E P/ABV and with sustainable
RoEs of at least 17%, the stock is inexpensive. Hence, we maintain a Buy on the
Strong credit growth; multiple levers to improve it further
During 3QFY2011, the bank showed strong traction in business. Advances grew
by 9.4% qoq and 22% yoy to `25,363cr compared to growth of 0.6% qoq and
9.8% yoy in 2QFY2011. Deposits increased by 3% qoq and 21.4% yoy to
`40,877cr. The faster credit growth aided the improvement in credit-to-deposit
ratio to 62.1% from 58.4% in 2QFY2011.
The bank is likely to see repayment of loans to the tune ~`2,300cr (~9.1% of the
loan book as of 3QFY2011) from the Jammu & Kashmir state government over
the next couple of quarters. However, despite this management is confident of
achieving balance sheet growth of 20-25% in FY2012. Management has indicated
of having sanctions of ~`3,000cr that will be disbursed in 4QFY2011.
To leverage the low CD ratio, the bank plans to increase exposure outside the state
of J&K. Plans on the anvil include opening 10 branches p.a. outside the state of
J&K, in the commercial centres and in southern tier-II and tier-III cities for
increasing its advances and exploiting its specialisation in agricultural lending,
respectively.
We believe that the bank has ample headroom to grow its advances at a healthy
pace, even in the current systemic liquidity deficit scenario, given its low credit-todeposit
ratio of 62.1% as of 3QFY2011. Accordingly, we have factored in credit
growth of 18% for FY2011 and 22% for FY2012.
During 3QFY2011, total deposits of the bank grew by 21.4% yoy on the back of
strong growth in savings account deposits of 29.2% yoy. However, on account of
the 6.9% yoy decline in current account deposits, overall CASA deposits growth
was lower at 16.8% yoy. On a sequential basis, deposit growth was muted at 3%
due to coming off of current account floats (declining 16.7% qoq).
On account of relatively slower growth in CASA deposits, the bank’s CASA ratio
declined to 39.6% from 41.1% each in 2QFY2011 and 3QFY2010. However, the
bank’s CASA ratio still remains amongst the better ones in industry and is expected
to cushion NIM pressures in the current rising interest rate environment.
Out of the total deposits, ~65% is contributed by the state of J&K. Of this 65%,
~55% of the deposits comprise CASA deposits. The pace of CASA deposits
accretion in the state of J&K is expected to be maintained with the bank planning
to open ~30-40 branches p.a. in the rural areas of J&K going forward.
stock, with a Target Price of `987, implying an upside of 33% from current levels.
NIM improves due to falling cost of deposits and rising yield on
investments
Reported NIMs for 3QFY2011 improved both sequentially and on a yoy basis to
3.70% from 3.66% in 2QFY2011 and 3.28% in 3QFY2010. The sequential
expansion in NIM came on the back of the 9bp qoq fall in cost of deposits and
43bp improvement in yield on investments. Yield on advances declined
sequentially by 29bp to 10.71%. Improvement in NIMs led to a healthy 32.7% yoy
growth in net interest income (NII) to `390cr.
Going forward, the bank’s yield on advances is likely to improve on account of
utilisation of ~`2,300cr of proposed loan repayment by the J&K government
for higher yielding advances. Management is targeting to maintain a NIM of
~3.5% for 4QFY2011, which is 20bp lower than that of 3QFY2011.
Robust asset quality
The bank continued to maintain robust asset quality with gross NPAs declining by
1.7% qoq to `504cr and net NPAs dipping by 65.7% qoq to a marginal `11cr.
Consequently, the gross NPA ratio improved to 1.95% from 2.17% in 2QFY2011
and the net NPA ratio improved to 0.04% from 0.13% in 2QFY2011. Provision
coverage ratio, which was already the best in the industry, further improved to
98.4% from 95.5% in 2QFY2011. NPA provisions-to-average assets declined to
0.1% from 0.4% each in 1HFY2011 and FY2010. Management is targeting to
reduce the gross NPAs by ~`70cr in 4QFY2011.
During 3QFY2011, provisioning expenses declined by 21.1% qoq to `31cr on the
back of the substantial 61.5% qoq decline in NPA provisions compared to
2QFY2011. NPA provisions fell by 25% yoy to `15cr. Provisions for restructured
advances doubled sequentially to `6cr, but were up a moderate 14.2% yoy.
Operating expenses under control; branch expansion to pick up
Operating expenses increased 14.5% qoq and 28.7% yoy to `186cr on the back
of the 37.2% rise in employee expenses and 13.4% increase in other operating
costs. As the bank’s operating income grew at a relatively slower rate of 20% yoy,
the cost-to-income ratio increased to 39.9% (36.4% in 2QFY2011 and 37.2% in
3QFY2010).
The bank’s branch network growth has been muted over the past one year.
However, going forward the bank is planning to roll out ~40-50 branches every
year out of which 30-40 are planned in the state of Jammu & Kashmir, while ~10
branches will be opened in commercial centres and certain tier-II and III southern
cities. This planned expansion is expected to further strengthen the liability
franchise through CASA deposit accretion and better NIM on the back of
improvement in credit-to-deposit ratio.
Strong capital adequacy
The bank has strong capital adequacy with CAR of 15.5%, out of which more than
82% is tier-I component. Hence, the bank is well capitalised to grow at a healthy
pace and also has ample headroom for raising funds through tier-II components.
However, the bank’s capital adequacy is likely to decline by ~100bp due to
utilisation of the amount repaid by the J&K state government for advances with
higher risk weightage.
Investment Arguments
Well-protected loan book
Structurally the bank's credit mix has only a small portion directly exposed to credit
risks from political disturbances in J&K state. For instance, 48.5% of the bank's
`23,183cr loan book as of 1HFY2011 is outside the state of Jammu & Kashmir, of
which 60% is to corporates. Further, ~40% of J&K lending has almost no risk
attached to it, being lent to the state government and its employees. The
repayment of state government loans is also likely to be deployed in high rated
corporates outside J&K. Only 17% of the total loans are in the relatively sensitive
Kashmir valley region, large portion of which is to the healthy horticulture and
trade sectors, which see minimal disruption even during strikes due to essential
linkages with rest of the country.
Robust asset quality
Over the years, the bank has maintained robust asset quality, with the best-inindustry
provision coverage ratio of 98.4% as of 3QFY2011. Despite substantial
disturbances in 3QFY2011, the bank managed to maintain its strong track record
on the asset quality front with an actual decrease in gross NPAs. On a conservative
basis, we have factored in provisioning expenses of `67cr for 4QFY2011, which is
more than double of 3QFY2011. Moreover, being almost the sole source of
funding in the state with a credit market share of 87%, once disturbances subside,
the bank has usually seen very strong recoveries too.
Strong branch network and legacy = dominant market share
The bank has ~400 branches in J&K. Due to its strong branch network and legacy
of banking relationships, the bank has a dominant 70% market share in deposits
in J&K. CASA deposits constituted a strong 51.2% of the incremental deposits
growth from FY2004-10. This strong base of low-cost deposits is expected to
sustain one of the highest NIMs amongst mid-sized banks of 3.3-3.4%.
Attractive valuations
The stock is trading at 0.9x FY2012E ABV vis-à-vis its historic range of 0.8-1.4x
and 5-year median of 1.1x. 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 that 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, credit) in J&K, at just 0.9x FY2012E P/ABV and with sustainable
RoEs of at least 17%, the stock is still inexpensive. Moreover, immediate levers in
the form of increase in CD ratio from the current low 62.1% as well as
re-deployment of state government loans into higher yielding advances are likely
to provide near-term higher momentum to NII growth for the bank relative to other
mid-sized banks. Further, with 40% CASA ratio, the bank is also more favourably
placed than its peers to handle NIM pressures from rising deposit rates. Hence, we
maintain a Buy on the stock, with a Target Price of `987, implying an upside of
33% from current levels.
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