Jammu & Kashmir Bank - Premium quality at comfortable valuations... - ICICIdirect

Jammu and Kashmir (J&K) Bank is the only private sector bank with state government's majority holding (53%). With improving J&K economy, the bank has entered a high growth phase and is well poised to sustain healthy credit growth (25% within J&K) for two or three years to come. It has a niche market in J&K with market share of ~70% in both deposits and credit as on FY12. About 55% of the bank's total business is generated from J&K wherein it enjoys 53% CASA ratio and 6% NIM. Going forward, NIM for the whole bank is expected to sustain at current levels in the range of 3.7-3.9% as it aims for faster pace of credit growth within J&K and improvement in CD ratio from current 62% to ~65%. We estimate business will grow at 20% CAGR to Rs.124164.2 crore, which would support profits CAGR of 25.1% to Rs.1256.7 crore over FY12-14E.

- The opportunity to grow the credit book remains wide open for the bank. J&K constitutes 1% of India's population while its share in national GDP and credit is low at 0.8% and 0.3%, respectively

- The bank enjoys lucrative NIM of 6% within J&K state. If credit grows at a faster pace within J&K, it will support NII and profitability growth

- The cost to income ratio is among lowest in the industry at 35%

- Asset quality of the bank is superior with GNPA ratio of 1.6%, NNPA ratio of 0.2% and PCR above 90%. The absolute GNPA has hardly increased from Rs.502 crore in FY07 to Rs.517 crore in FY12. The consolidation phase during FY07-11 (11.3% credit CAGR) is yielding positive results as it is resulting in lower NPA levels currently

- The bank has not raised capital since its IPO in 1998 and management indicated it can sustain for next three years without fresh capital infusion. This shows self sustaining performance of bank leading to RoE accretion

- High concentration in J&K exposes the bank to state-specific risk. Industrial activity is yet to pick up in the state, which is essential for sustainable long term growth of the economy

- The bank is selling about half its stake (11.5% held) in MetLife Insurance where it may book ~Rs.140 crore profit, as per management in H2FY13E.

Valuations reasonable

Attractive return ratios with RoA of 1.5%+ and RoE of 20%+ should sustain. It is better than the industry in most parameters including NIM, CASA ratio, C/I ratio, NPA ratios, PCR, etc. Even after the sharp rally in the stock, it is trading at cheap valuation (1.1x FY14E ABV) when compared to other banks having RoA of 1.5%+. Based on the Gordon growth model and providing for 20% regional discount, we have valued the bank at 1.3x FY14E ABV with a target price of Rs.1600. We recommend BUY.

Source : Equity Bulls

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