Stock Fundamentals

Jammu and Kashmir Bank: BUY

Radhika Merwin | Updated on March 12, 2018 Published on October 05, 2013

The bank aims to increase lending within J&K. — Nissar Ahmad

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Healthy loan growth, high net interest margins, stable asset quality and strong returns are positives for the only State-owned private sector bank — Jammu and Kashmir (J&K)Bank.

The banker to the J&K Government, the bank enjoys dominant market position in the State, thanks to its entrenched and expanding branch presence. Pursuing its strategy of increasing lending within the State, the bank is well-poised to benefit from an improving economy in J&K.

Lending within the State gives the bank healthy net interest margin (NIM) of 6 per cent. This should continue to drive profitability. Also, sound asset quality will aid returns. In the banking sector, J&K Bank’s return on equity of 24 per cent is among the highest. A strong capital position should help expansion and growth over the next two-to-three years.

At the current price of Rs 1,140, the stock trades at a comfortable 0.9 times its one-year forward book value and 1.1 times its adjusted book value. This is at a discount to most of its peers in the mid-cap space such as IndusInd Bank (2.4) and Ing Vysya Bank (1.3).

Dominant presence

While the bank’s high branch presence in J&K exposes it to political risk within the State, a well-diversified lending presence provides a hedge. Investors with a two-to-three year horizon can invest in the stock.

J&K Bank is the only private sector bank in the country in which a State government holds 53 per cent. The bank has been designated as the RBI’s agent for banking business within J&K.

It conducts the banking business of the Centre, collecting direct and indirect taxes and utility payments on its behalf. This gives the bank significant competitive advantage over its peers within the State.

Out of 695 branches, it has 582 branches in the state, almost four times more than that of its nearest competitor SBI. The bank has a market share of 65-70 per cent in deposits and loans in J&K.

This has led to a strong current account savings account (CASA) ratio of 40 per cent which the bank targets to improve to 43 per cent by the end of this fiscal.

The bank’s loan book has grown 17 per cent annually over the last four years. Currently, the State of J&K contributes 40 per cent of the total loan book. The bank aims to increase its lending within the State making use of the wide opportunity available in the state. The J&K economy has picked up pace in the past two years, growing above 6.5 per cent.

The banking sector, though, is under-penetrated. While the State accounts for 0.6 per cent of India’s gross domestic product, it accounts for only 0.3 per cent of the total national credit. J&K Bank aims to bridge the credit gap, with focus on underserved sectors.

For instance, out of more than 2,83,000 apple growers in the state, the bank lends only to about 17,000. The bank plans to target this significant market, much of which today borrows from traders at high interest rates. With capital adequacy of 13.6 per cent currently, J&K Bank is well-capitalised to grow its loan book at its targeted pace of 20 per cent in FY 2014.

Margin levers

Although the bank garners nearly 68 per cent of its deposits from J&K, its credit-to-deposit ratio within the State is low at 43 per cent.

Even as lending within the state is expected to improve over the coming years, the bank is in a comfortable position to deploy excess deposits mobilised from within the state in other parts of the country.

Within J&K, the bank’s loan book primarily comprises personal loan and loans to small and medium enterprises (SME).

These high-yielding loans have helped the bank earns a high net interest margin of 6.3 per cent within the state. Outside J&K, lending is predominantly to high rated, low risk corporates. But these loans typically have lower yields (NIM of 2.6 per cent). As a result, the blended NIM of the bank is at around 4 per cent.

With continued focus within J&K, the bank should be able to achieve better margins. The bank opened 83 branches in FY 2013 in the state, and targets to open 300 new branches by March 2015. Besides, the bank thanks to its dominant presence in J&K has been able to maintain a healthy low cost deposit ratio (40 per cent overall). This is expected to continue and should aid margins.

Asset quality remains steady

The bank has been able to improve its asset quality over the last four years. Its gross non-performing assets, as a percentage of loans, have reduced from 2.6 per cent in 2008-09 to 1.6 per cent in 2012-13.

Also, the high provision coverage of 94 per cent currently maintained by the bank provides comfort. Almost 83 per cent of the advances are secured.

Even though the bank’s restructured assets at 4 per cent of loans is higher than most of its private sector peers, fresh slippages from the restructured book is minimal at 11 per cent.

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Published on October 05, 2013
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