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J&K Bank ------------------------------------------------------------------------Maintain OUTPERFORM
Loan growth pick-up a big positive
● J&K Bank reported robust 3Q11 results (net profit of Rs1.7 bn;
20% YoY), in line with our estimates. Its 3Q margins and asset
quality were stable, while loan growth was better than expected.
● The key highlight of the quarter was strong loan growth (9% QoQ;
22% YoY), which was in line with the system growth after almost
five years and management expects the current growth
momentum to be sustained in 4Q as well.
● NII growth was strong (33% YoY), aided by a 42 bp YoY margin
expansion and 146 bp expansion in investment yields. Margins
were stable QoQ at 3.7%. With loan-deposit ratio of only 62%, the
bank is well placed in the current high interest rate environment.
Asset quality stayed robust – 2.0% gross NPLs and 98% NPL
coverage.
● While the J&K state government’s overdraft business will shift to
the RBI, the impact on the bank is likely to be minimal (the bank
should be able to replace the low-yielding state government loans;
and its current accounts and fee income will be unaffected.)
● With the stock trading at 0.8x FY12E BV, 4.9x EPS and with loan
growth picking up, we expect the stock to rerate; We maintain our
OUTPERFORM rating.
Robust operating performance
J&K Bank reported a strong 3Q11 net profit (Rs1.7 bn; 20% YoY), in
line with our estimate. Its loan growth pick-up (9% QoQ; 22% YoY)
was the key highlight during the quarter and was driven by both loans
within the J&K state and corporate loans (outside of J&K).
Management expects the growth momentum to be sustained even in
4Q11. However, with the J&K state government’s overdraft facility set
to run-off by 1 April, we maintain our FY11 loan growth forecast of
16% (there could be upside to our estimate, if the bank could replace
these loans). The bank’s net interest income was up a robust 33%
YoY, driven by a 42 bp margin expansion (to 3.7%) and 146 bp
expansion in investment yields. NIMs were stable on a QoQ basis at
3.7%. Our forecast FY12 margins are at 3.5%. Credit-deposit for the
bank improved 363 bp QoQ to 62% (but still it is among the lowest in
the system, which is a positive in the current high interest rate
environment). Deposit franchise continued to be strong, aided by a
robust 29% YoY growth in savings deposits. However, CASA share
was down 157 bp to 40%, driven by a 17% QoQ drop in current
accounts. Fee income (16% YoY) as a percentage of total income
continued to be low at 13% in 3Q11. The bank’s profitability remained
robust with ROA of 1.5% and RoE of 20% during the quarter. Its Tier I
was a healthy 11.7% (excluding 9M11 profits).
Asset quality continues to be strong
Gross NPLs (%) declined 22 bp QoQ to 2.0% and the NPL coverage
improved to 98% (from 94% in 2Q11) despite low credit costs of 0.3%.
The bank restructured loans of Rs1.5 bn (0.6%) during the quarter and
outstanding restructured loans are at 2.0%. We forecast credit costs
are at 0.8% for FY12.
J&K state government’s overdraft business to shift to RBI – no
significant impact
J&K Bank was uniquely positioned as it was providing overdraft facility to
the state government. After 1 April 2011, even for the J&K government,
this facility will be available only from the RBI and its overdraft account
with J&K Bank will be discontinued. For J&K Bank, the overdraft facility
(loans of Rs20 bn – 9% of loan book) will now be repaid. We believe in
the current tight liquidity environment, it should not be difficult for J&K
Bank to replace this credit. The current yield on the state government
overdraft facility is 9.6% and the bank should be able to replace it with a
similar yield, given that incr’l term deposit costs in the system are at 9-
10%. J&K Bank will continue to be the banker for the J&K state (current
accounts and fee income will be unaffected).
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
J&K Bank ------------------------------------------------------------------------Maintain OUTPERFORM
Loan growth pick-up a big positive
● J&K Bank reported robust 3Q11 results (net profit of Rs1.7 bn;
20% YoY), in line with our estimates. Its 3Q margins and asset
quality were stable, while loan growth was better than expected.
● The key highlight of the quarter was strong loan growth (9% QoQ;
22% YoY), which was in line with the system growth after almost
five years and management expects the current growth
momentum to be sustained in 4Q as well.
● NII growth was strong (33% YoY), aided by a 42 bp YoY margin
expansion and 146 bp expansion in investment yields. Margins
were stable QoQ at 3.7%. With loan-deposit ratio of only 62%, the
bank is well placed in the current high interest rate environment.
Asset quality stayed robust – 2.0% gross NPLs and 98% NPL
coverage.
● While the J&K state government’s overdraft business will shift to
the RBI, the impact on the bank is likely to be minimal (the bank
should be able to replace the low-yielding state government loans;
and its current accounts and fee income will be unaffected.)
● With the stock trading at 0.8x FY12E BV, 4.9x EPS and with loan
growth picking up, we expect the stock to rerate; We maintain our
OUTPERFORM rating.
Robust operating performance
J&K Bank reported a strong 3Q11 net profit (Rs1.7 bn; 20% YoY), in
line with our estimate. Its loan growth pick-up (9% QoQ; 22% YoY)
was the key highlight during the quarter and was driven by both loans
within the J&K state and corporate loans (outside of J&K).
Management expects the growth momentum to be sustained even in
4Q11. However, with the J&K state government’s overdraft facility set
to run-off by 1 April, we maintain our FY11 loan growth forecast of
16% (there could be upside to our estimate, if the bank could replace
these loans). The bank’s net interest income was up a robust 33%
YoY, driven by a 42 bp margin expansion (to 3.7%) and 146 bp
expansion in investment yields. NIMs were stable on a QoQ basis at
3.7%. Our forecast FY12 margins are at 3.5%. Credit-deposit for the
bank improved 363 bp QoQ to 62% (but still it is among the lowest in
the system, which is a positive in the current high interest rate
environment). Deposit franchise continued to be strong, aided by a
robust 29% YoY growth in savings deposits. However, CASA share
was down 157 bp to 40%, driven by a 17% QoQ drop in current
accounts. Fee income (16% YoY) as a percentage of total income
continued to be low at 13% in 3Q11. The bank’s profitability remained
robust with ROA of 1.5% and RoE of 20% during the quarter. Its Tier I
was a healthy 11.7% (excluding 9M11 profits).
Asset quality continues to be strong
Gross NPLs (%) declined 22 bp QoQ to 2.0% and the NPL coverage
improved to 98% (from 94% in 2Q11) despite low credit costs of 0.3%.
The bank restructured loans of Rs1.5 bn (0.6%) during the quarter and
outstanding restructured loans are at 2.0%. We forecast credit costs
are at 0.8% for FY12.
J&K state government’s overdraft business to shift to RBI – no
significant impact
J&K Bank was uniquely positioned as it was providing overdraft facility to
the state government. After 1 April 2011, even for the J&K government,
this facility will be available only from the RBI and its overdraft account
with J&K Bank will be discontinued. For J&K Bank, the overdraft facility
(loans of Rs20 bn – 9% of loan book) will now be repaid. We believe in
the current tight liquidity environment, it should not be difficult for J&K
Bank to replace this credit. The current yield on the state government
overdraft facility is 9.6% and the bank should be able to replace it with a
similar yield, given that incr’l term deposit costs in the system are at 9-
10%. J&K Bank will continue to be the banker for the J&K state (current
accounts and fee income will be unaffected).
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