Jammu & Kashmir Bank: TP: INR975 Buy:: Motilal Oswal

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Jammu & Kashmir Bank's (J&KBK) 1QFY12 profit grew 25% YoY to INR1.8b led by strong NII growth of 20% YoY.
Despite a higher share of savings deposits (30%), QoQ improvement in NIM (10bp) was a positive surprise. Key highlights:
 Loan growth strong: Loans grew ~15% YoY and ~1% QoQ to INR264b and deposits were up ~15% YoY (down 4%
QoQ) to INR431b. CD ratio improved to 61.3% v/s 58.6% in 4QFY11 (stable YoY). The management has guided for
loan growth of 25% and deposit growth of 20% in FY12.
 Margins up 10bp QoQ, a positive surprise: Margins improved 10bp QoQ to 3.82%. While, cost of deposits was
sequentially stable at 5.38%, yields on loans improved 27bp to 11.42% leading to improvement in margins. The
management has guided for margins of 4% for FY12.
 Non-interest income down 28% YoY: Overall non-interest income declined 28% YoY and 44% QoQ led by a
decline in trading gains. Fee income (CEB + insurance income) was muted YoY at INR416m. Cost to income ratio
declined to 37.3% v/s 46.6% in 4QFY11 (40.2% in 1QFY11).
 Asset quality sequentially stable: In absolute terms, GNPA was up 2% QoQ but NNPA was up 10% QoQ (on a
lower base) at INR584m. In percentage terms GNPA and NNPA were stable at 1.97% and 0.22% respectively.
Annualized slippage ratio of 1.3% was stable compared with FY11. PCR (including technical write-offs) were 92.5%.
 Lower provisions drives profitability: Overall provisions declined to INR445m v/s INR756m in 4QFY11 (and INR700m
in 1QFY11) including contingency provision.
 Other highlights: J&KBK has ~7% stake in Metlife. The management is considering selling a part of this investment
in 2QFY12.
Valuation and view: The stock trades at of 1x FY12E BV of INR838 and 0.9x FY13E BV of INR976. We have not
considered the Metlife value in our valuations. Maintain Buy with a target price of INR975 (P/BV of 1x FY13E).



Loan growth strong, CASA ratio up 255bp YoY
Loans grew ~15% YoY and ~1% QoQ to INR264b and deposits were up ~15% YoY
(down 4% QoQ) at INR431b. CD ratio improved to 61.3% v/s 58.6% in 4QFY11 (stable
YoY) led by a decline in deposits in 1QFY12. CASA deposits grew 22% YoY, but declined
4% QoQ. SA deposits grew 27% YoY (up 4% QoQ), however CA deposits growth
moderated to 10% YoY (declined 22% QoQ), leading to moderation in CASA growth in
1QFY12. Reported CASA ratio was flat QoQ and improved ~255bp YoY to 40.4%. The
management's FY12 loan growth guidance is 25% and deposit growth of 20%. It expects
to maintain CD ratio at ~65%.
Margins up 10bp QoQ, a positive surprise
Margins improved 10bp QoQ to 3.82%. While, cost of deposits were stable QoQ at 5.38%,
yield on loans improved 27bp to 11.42% leading to improvement in margins. Going forward,
adequate liquidity on the balance sheet (CD ratio of ~61%) and a high proportion of
CASA deposits (40.4%) will provide a cushion to margins. The management has guided
for margins of ~4% for FY12.
Non-interest income down 28% YoY
Overall non-interest income declined by 28% YoY and 44% QoQ led by a decline in
trading gains. Trading profits declined to INR101m v/s INR227m in 4QFY11 and INR336m
a year earlier. Fee income (CEB + insurance income) was muted YoY at INR416m
(INR514m in 4QFY11). Opex grew 10% YoY (down 21% QoQ). Cost to income ratio
declined to 37.3% v/s 46.6% in 4QFY11 and 40.2% in 1QFY11.
Stable Asset quality
In absolute terms GNPA was up 2% QoQ but NNPA was up 10% QoQ at INR584m. In
percentage terms GNPA and NNPA were stable QoQ at 1.97% and 0.22% respectively
(same as in 4QFY11). Slippages in 1QFY12 amounted to INR860m (annualized slippage
ratio of 1.3% stable compared with FY11) and upgradation and recoveries were INR670m.
The total restructured book was INR20b, of which assets worth INR400m slipped into
NPAs in 1QFY12. PCR (including technical write-offs) stood at 92.5% (stable QoQ).
The management does not foresee pressure on asset quality and expects strong recoveries
to lead to improvement in GNPA.
Lower provisions drives profitability
Overall provisions declined to INR445m v/s INR756m in 4QFY11 (and INR700m in
1QFY11) including contingency provision. In 1QFY12 J&KBK provided INR250m towards
NPA v/s INR320m in 4QFY11 and INR440m in 1QFY11. MTM provision declined sharply
to INR37m v/s 198m in 4QFY11 v/s INR259m in 1QFY11.


Other highlights
J&KBK has ~7% stake in Metlife. The management is considering selling part of this
investment in 2QFY12.
Valuation and view
J&KBK was risk averse over the past 3-4 years and loan CAGR was ~11%. However,
going forward, the management intends to grow faster than the industry, which is crucial
to earnings growth. J&KBK's focused growth strategy towards Jammu & Kashmir has
paid off with stable margins, high CASA ratio and improving core business performance.
J&KBK will retain its market leadership in the state and focus on qualitative growth.
Key ratios are among the best in the industry: (1) margins of over 3.5%, (2) NNPA at
0.2%, (3) PCR of ~90%, and (4) RoA of over 1.3% and RoE of ~19%.The stock trades
at of 1x FY12E BV of INR838 and 0.9x FY13E BV of INR976. We have not considered
the Metlife value in our valuations. Maintain Buy with a target price of INR975 (P/BV of
1x FY13E).