Jammu & Kashmir Bank - Prabhudas Lilladher

State liability advantage: J&K Bank enjoys a very strong liability franchise due to its state advantage, with CASA within J&K at ~55%. Despite just ~15% CASA outside J&K, J&K Bank's total CASA at ~38.2% is among the best in the industry, providing the bank with a significant cost advantage.

Growth picking up in J&K; Bank best positioned: Management's intended growth acceleration after five years of consolidation coincides with a phase of strong economic growth and activity in J&K. With ~60% market share in advances and deposits, we believe J&K Bank is best positioned to benefit from the J&K story. Also, outside J&K, the bank is concentrating on expanding lending expertise to mid corporate (predominantly AAA till now) and that will aid in improving lending yields.

Competition will not be disruptive: High CASA + low operating costs make J&K an attractive expansion opportunity for private banks. However, our feedback from large private banks suggest that competition will not be disruptive. Also, expertise in specific segments like horticulture lending and state business (30% of J&K Bank's loans) will be less impacted by competition.

More private than PSU bank; Valuation benchmarking with PSU's unwarranted: Low fees income and CA ratio are the only commonalities with PSU banks, apart from which J&K Bank is more of a private bank on most fundamental parameters like high CASA and margins, sound underwriting and high ROAs/RORWAs. Management continuity, which is a big issue with PSUs, is also absent in J&K Bank with ~5-6 years of average tenure for the Chairman; thus, valuation benchmarking to mid-cap PSU banks is unwarranted. The bank is trading at 1.3x FY13 P/B with ROE at plus 20%.

Source : Equity Bulls

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