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Anand Rathi
J&K Bank (Buy)
CMP: ₹39.25
Target: ₹64
J&K Bank management aims to expand its footprint across the State through branch expansion and growing the State’s loan book faster than the overall loan book. Keeping in mind this strategy, we expect medium-term growth to come in the mid-teens. Besides, with 11.6 per cent capital adequacy (tier-1: 9.8 per cent), the bank is adequately capitalised for short-term mid-teen loan growth. If, however, the loan book grows above 20 per cent (as intended by the management), additional capital would require to be raised.
We expect NIM to gradually expand from current levels because of a) aggressive lending in its home State where it can charge a higher interest rate; b) its strong liability franchise; and c) expected lower slippages. However, we expect the cost-income ratio to be high in the short term on account of the vigorous branch expansion plans in the home state.
In the last 12 months, after emerging from the moratorium period, limited stress and steady repayment are seen in the restructured book from the home state. Management retains a positive outlook on this portfolio and does not expect any negative surprises from it.
Valuation: Our January 2020 target (₹64) is based on the two-stage DDM model. This implies a about 0.6x P/ABV multiple on its FY21e book.
Risks: Lumpy delinquencies from the restructured book; unrest in the home State.
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