Jammu and Kashmir Bank- Beats estimates; outperforms on every front : Reliance Sec

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Beats estimates; outperforms on every front
Key highlights of the result
 Strong NII on the back of high growth in advances: In 4QFY2012, Jammu and
Kashmir (J&K) Bank’s Net Interest Income (NII) increased 24.1% yoy and 14.5%
qoq to Rs516cr due to strong growth in advances and lower cost of funds. Noninterest
income reported a growth of 2.7% yoy and 66.1% qoq to Rs122cr.
Operating expenses declined 7.6% yoy, whereas it increased 9.9% qoq to
Rs221cr in 4QFY2012. Provisions increased 11.5% yoy and 364% qoq to
Rs84cr. Net profit witnessed an increase of 50.2% yoy, but it declined 2.4% qoq
to Rs208cr in 4QFY2012.
 High loan growth & steady NIMs: Total loan book grew 26.3% yoy and 11.2%
qoq to Rs33,077cr as on March 31, 2012. Major growth was seen from its
Corporate and SME loan book which together contributed ~72% of the total
advances. Total deposits of the bank grew 19.4% yoy and 9.4% qoq to
Rs53,347cr as on March 31, 2012. The CASA ratio improved 22bp yoy and
53bp qoq to 40.7% as on 4QFY2012. NIM was steady at 3.6% for FY2012.
 Improving asset quality: GNPAs of the bank stood at 1.6% (Rs517cr) and
NNPAs were reported at 0.1% (Rs49cr) as on 4QFY2012. The bank improved its
asset quality on the back of strong recoveries of Rs317cr for FY2012. Provision
coverage ratio stood at ~94%.
 Other highlights: The bank is well capitalized with total capital adequacy ratio at
13.4% and Tier 1 at 11.1% as on 4QFY2012. The bank added 55 branches
since April 1, 2011 taking the total to 603 branches as on 4QFY2012.
Outlook and Valuation
J&K Bank met all its guided estimates for 4QFY2012 and FY2012. The bank, with
good return ratios (ROE of 21%, ROA of 1.5%) and high capitalization (Tier 1 of
11.1%), is well positioned to leverage and benefit from its geographical expertise &
core competence, with an increase in credit penetration in J&K region (71% share in
advances). Net interest margin for the bank is 3.5%+, owing to strong liability
franchise (40%+ low-cost deposit proportion) and high-yielding loans due to superior
pricing power in J&K state. We expect both earnings and total assets to increase at
18% CAGR over FY2011-FY2013E.
At CMP of Rs859, the stock is trading at an undemanding 0.7x ABV FY2014E. We
rollover our valuation to FY2014 estimates and maintain our Buy recommendation on
J&K Bank with a target price of Rs1,163.
Risks to the view
 Any unprecedented geo-political turmoil in the J&K State would hamper the
overall business sentiment and increase risk associated with lower than
expected GDP growth for the state
 Global turmoil relating to European debt crisis or US economy would hamper
India’s overall economy, and hence, holds downside risk to our growth estimates
for the bank