J&K Bank's 1QFY13 PAT grew 35% YoY to ~INR2.5b. Healthy NII growth of ~23% YoY coupled with containment of
opex (up 14% YoY) and lower provisions (INR504m v/s INR843m in 4QFY12 and INR445m in 1QFY12) boosted
bottom-line. Key Highlights:
Reported margins declined 6bp QoQ to 3.8%. While cost of deposits increased 52bp QoQ to 6.9%, higher yield
on loans (+22bp QoQ) and investments (+27bp QoQ) helped bank to contain margin fall.
In 1QFY13, bank shifted its loan portfolio between INR1m and INR5m to system based NPA recognition.
However despite that slippages were contained to INR857m (annualized slippage ratio of 1.3% as compared
to 1.2% in FY12).
In 1QFY13, the bank restructured loans of INR400m, taking the outstanding restructured loan portfolio to
INR13.7b, 4.1% of overall loans.
During the quarter bank made provision for contingencies of INR239m taking the cumulative number to
INR800m, which the bank intends to utilize in case asset quality comes under pressure.
Loans and deposits grew 26% and 23% YpY respectively and remained flat QoQ. CD ratio improved marginally
by 60bp QoQ to 62.6%. CASA ratio declined 200bp QoQ to 38.7%.
Valuation and view: JKBK continues to deliver healthy performance on business growth, margins and asset quality.
While shifting to system based recognition of NPA and strong growth in corporate segment outside J&K remains
a risk to asset quality, strong margins of 3.7-3.8% and PCR of 94% would provide cushion. Maintain Buy.
Strong business growth on the back of lower base
While on a sequential basis business growth remained muted, on a YoY basis loans
and deposits grew 26% and 23% respectively. CD ratio improved marginally by 60bp
QoQ to 62.6%, and there still remains ample of scope to improve CD ratio from hereon
which would cushion margins. CASA deposits grew 18% YoY but declined 5% QoQ
to INR205.6b led by moderation in CA deposits (+7% YoY but down 22% QoQ). As a
consequence CASA ratio declined 200bp QoQ to 38.7%. SA deposits growth was healthy
at 22% YoY (largely flat QoQ).
Margin decline just 6bp QoQ; strong fee income growth
Reported margins declined 6bp QoQ to 3.8%. While cost of deposits increased 52bp
QoQ to 6.9%, higher yield on loans (+22bp QoQ) and investments (+27bp QoQ) partially
negated the impact and led to healthy margin performance. Non-interest income
growth was strong at 39% YoY led by fee income growth of +28% YoY and higher treasury
income (INR202m v/s INR100m in 1QFY12 and INR227m in 4QFY12). Income from
insurance commission was flat YoY at INR75m. As a result overall core income grew
3% QoQ and 23% YoY to ~INR5.9b.
Healthy asset quality performance; PCR at 90%+ one of the best in the
industry
During the quarter bank shifted its portfolio in between INR1m and INR5m to system
based NPA recognition. However, despite that there was no surprise on the asset
quality front as bank contained its slippages to INR857m (annualized slippage ratio of
1.3% as compared to 1.2% in FY12). Remaining portfolio of INR82.9b (25% of overall
loans; ~0.5m accounts) is expected to be transited to system based recognition by
end of Sept-12. However management clarified that of the remaining portfolio that is
to be transited INR47.5b (14.3% of overall loans) is to state government employees
(personal finance) where the loan is guaranteed by their salary. Thereby asset quality
is expected to remain healthy.
Bank continued to maintain high PCR of 94% (one of the highest in the industry),
thereby NNPA was contained. While GNPA in percentage terms stood at 1.6%, NNPA%
was at just 14bp (flat QoQ). During the quarter, the bank restructured loans of INR400m,
taking the outstanding restructured loan portfolio to INR13.7b, 4.1% of overall loans.
Other highlights
Given the current environment bank has made a contingent provision of INR239m
taking the cumulative number to INR800m, which bank expects to utilize in case
asset quality comes under pressure.
Bank has entered into an agreement to sell 52m shares of Metlife India at a price
of INR36.5 per share (totalling to INR1.9b), however the process is pending approval
of IRDA. Further 66m shares are expected to be sold to PNB, however the price is
yet not determined. Bank currently hold 220m shares of MetLife India and post
completion of both the transaction, it would be still have 102m shares left.
Break-up of loans with J&K (40% of overall loans): Agriculture segment - 15%;
Trade - 16%; Personal Segment - 35%; SME - 16%; Corporate - 18%
Break-up of loans outside J&K (60% of overall loans): Agriculture segment - 7%;
Trade - 12%; Personal Segment - 4%; SME - 3%; Corporate - 81%
Major portion of corporate loans is towards term loans, however bank would
target to increase the share of working capital financing from here-on as it would
also provide impetus to fee income.
Valuation and view
JKBK continues to deliver healthy performance on business growth, margins and asset
quality. While shifting to system based recognition of NPA and strong growth in
corporate segment outside J&K remains a risk to asset quality, strong margins of 3.7-
3.8% and PCR of 94% would provide cushion. J&K Bank is expected to maintain RoA of
1.3%+ and RoE of ~20%.The stock trades at of 0.9x FY13 BV of INR986 and 0.8x FY14 BV
of INR1,144. Maintain Buy with a target price of INR1,145 (1x FY14E BV).
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