J&K Bank - Steady margins; loan growth yet to pick up. :: Kotak Sec

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J&K Bank (J&KBK)
Banks/Financial Institutions
Steady margins; loan growth yet to pick up. J&K Bank reported strong earnings
growth of 22% yoy to ` 1.6 bn driven by healthy NII growth (48% yoy). NIMs were
stable and remain above average at 3.66%. Loan growth continued to be subdued at
10% yoy. The management maintains that this will pick up in 2HFY11E. Valuations are
attractive, offering reasonable comfort at 1.1X FY2012 PBR for RoEs at about 18% and
negligible NPLs. We maintain our ADD rating with a target price of `1000.


NII growth impressive at 48% yoy; NIMs maintained qoq at 3.7%
J&K Bank’s net interest income (NII) increased by 48% yoy (2% qoq) to `3.7 bn in 2QFY11. NIMs
were maintained qoq despite the decline in CD ratio as the bulk of deposits raised during the
quarter was parked in investments. Sequentially, yields on advances increased by 10 bps to 11%
while yield on investments was maintained at 6.1%; cost of funds increased by 11 bps qoq. With a
low CD ratio and better pricing power, we believe the bank has comfortably strong margins as
loan book traction picks up.
Marginal deterioration in asset quality; provision coverage maintained at high levels of 94%
J&K Bank’s gross NPLs increased by 7% yoy (14% qoq) to `5.1 bn. Net NPLs increased from the
low of `81 mn to `309mn. The net NPL ratio stands at 0.1%, lowest in the industry, and we see
the recent increase fairly insignificant compared to the total loans. Loan loss provisions for the
quarter were at ` 390 mn (0.7% of loans). We do not expect the bank to maintain provisions at
such levels but it does provide reasonable comfort against any large slippage.
Loan growth remains subdued at 10% yoy -YTD at 0.5%; CD ratio at 58%
Loan growth continued to slow down to 10% yoy (12% in 1QFY11) to ` 232 bn (0.6% qoq). YTD
growth was at 0.5% and we believe that the recent change in management has resulted in the
bank slowing down its balance sheet growth, a trend which we expect to reverse with the
appointment of Mr. Mushtaq Ahmed as the new CMD of the bank. Deposit growth was
marginally stronger at 5.5% qoq (22% yoy) to `397 bn. CASA ratio for the quarter improved to
41%, partly driven by seasonality. The bank is well positioned to grow its loan book with a CD
ratio at 58% (flat qoq).