Jammu & Kashmir Bank - Continues to Deliver, Big earnings upgrade, Maintain BUY - Prabhudas Lilladher

Q2FY13 results surprised on profitability led by a beat in credit costs and margins. Operating performance was driven by improving margins and asset quality was stable despite migration to system-driven NPA recognition. We increase our FY13 estimates by ~6-9% driven by higher NIMs, increase our PT to Rs1,400/share (1.2x FY14 book) and maintain our positive view despite ~35% run up. Details of J&K's top-10 corporate exposures indicate much lower risk than expected by the street. Also, with our earnings upgrade, J&K Bank will deliver 21-22% ROEs over FY13-14 and thus, we believe benchmarking to PSU bank multiples is unwarranted, given a much superior ROA/ROE profile and lower asset quality risks.

- Strong show on NIMs; non-interest income aided by treasury: NIMs improved by ~10bps QoQ as loan yields surprised by ~20bps QoQ up move possibly due to higher proportion of J&K advances/some write-back. Management expects margins to further inch up as funding environment has improved and share of J&K state is expected to improve materially over the next 12-18 months. Noninterest income was higher-than-expected but the beat was largely driven by Rs260m of treasury gains adjusted for which core fee growth was muted.

- Continues to build on the growth momentum: Advances book inched up by ~3.5% QoQ and J&K Bank continues to sustain the growth momentum exceeding 20% YoY growth for the last 3-4 quarters. We do not have details on the J&K/non J&K mix but management in our recent road show guided to significant accretion in share of J&K advances, which will be margin accretive.

- Asset quality robust; Top-10 non-J&K exposures relatively safe: Asset quality continues to remain robust with lower Gross NPA ratio QoQ. Gross slippages of ~Rs1bn (1.2% annualised) included impact of transition to system-driven NPA recognition for

Source : Equity Bulls

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