Jammu and Kashmir Bank - 4QFY2012 Result Update - Reliance Securities

Beats estimates; outperforms on every front

Key highlights of the result

- Strong NII on the back of high growth in advances: In 4QFY2012, Jammu and Kashmir (J&K) Bank's Net Interest Income (NII) increased 24.1% yoy and 14.5% qoq to Rs516cr due to strong growth in advances and lower cost of funds. Noninterest income reported a growth of 2.7% yoy and 66.1% qoq to Rs122cr. Operating expenses declined 7.6% yoy, whereas it increased 9.9% qoq to Rs221cr in 4QFY2012. Provisions increased 11.5% yoy and 364% qoq to Rs84cr. Net profit witnessed an increase of 50.2% yoy, but it declined 2.4% qoq to Rs208cr in 4QFY2012.

- High loan growth & steady NIMs: Total loan book grew 26.3% yoy and 11.2% qoq to Rs33,077cr as on March 31, 2012. Major growth was seen from its Corporate and SME loan book which together contributed ~72% of the total advances. Total deposits of the bank grew 19.4% yoy and 9.4% qoq to Rs53,347cr as on March 31, 2012. The CASA ratio improved 22bp yoy and 53bp qoq to 40.7% as on 4QFY2012. NIM was steady at 3.6% for FY2012.

- Improving asset quality: GNPAs of the bank stood at 1.6% (Rs517cr) and NNPAs were reported at 0.1% (Rs49cr) as on 4QFY2012. The bank improved its asset quality on the back of strong recoveries of Rs317cr for FY2012. Provision coverage ratio stood at ~94%.

- Other highlights: The bank is well capitalized with total capital adequacy ratio at 13.4% and Tier 1 at 11.1% as on 4QFY2012. The bank added 55 branches since April 1, 2011 taking the total to 603 branches as on 4QFY2012.

Outlook and Valuation

J&K Bank met all its guided estimates for 4QFY2012 and FY2012. The bank, with good return ratios (ROE of 21%, ROA of 1.5%) and high capitalization (Tier 1 of 11.1%), is well positioned to leverage and benefit from its geographical expertise & core competence, with an increase in credit penetration in J&K region (71% share in advances). Net interest margin for the bank is 3.5%+, owing to strong liability franchise (40%+ low-cost deposit proportion) and high-yielding loans due to superior pricing power in J&K state. We expect both earnings and total assets to increase at 18% CAGR over FY2011-FY2013E.

At CMP of Rs859, the stock is trading at an undemanding 0.7x ABV FY2014E. We rollover our valuation to FY2014 estimates and maintain our Buy recommendation on J&K Bank with a target price of Rs1,163.

Risks to the view

- Any unprecedented geo-political turmoil in the J&K State would hamper the overall business sentiment and increase risk associated with lower than expected GDP growth for the state.

- Global turmoil relating to European debt crisis or US economy would hamper India's overall economy, and hence, holds downside risk to our growth estimates for the bank.

Source : Equity Bulls

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