Jammu & Kashmir Bank - Fundamental Call - Consortium

The Jammu & Kashmir Bank Limited reported better-than-expected PAT of Rs2.9bn, up 36% YoY. Loan growth was robust at ~20% YoY and margin expansion and asset quality surprised despite our high expectations. Despite building in margin contraction and ~30bps higher credit costs in FY14, we expect J&K bank to still deliver ROEs of +20% and thus, we find current valuations of 1.15x undemanding. The bank continues to deliver a focused growth with strong asset quality and remains our top mid cap pick in the Financial space, with a target of Rs1,600.

Positive margin surprise: Delivering a positive surprise on margins, the bank's NIMs in Q3FY13 expanded ~15bps QoQ. We see the increase in share of J&K advances in the overall loan book and fall in cost of funds, leading to gains in NIMs in Q3FY13. With expected softening in rates, margins may come under pressure but favourable J&K mix shall aid margins in the medium term.

Steady Operationally: (1) Loan growth at ~20% YoY growth has been in line with expectations, with higher growth from the J&K book (25% YoY) (2) Employee costs jumped 15% QoQ and part of this could be due to wage revision provisions. J&K bank has not been aggressive in expanding outside the state and hence, despite wage revisions, we expect cost income to remain under check.

Steady asset quality: Gross NPA also came in better-than-expected despite our high expectation. Management expects further improvement with recovery/upgrade expected in 1-2 accounts. Credit cost at ~25bps was lower than estimates (PLe: 40bps). Last 2-3 quarters does address street concerns on the bank's asset quality in non-J&K book. Also, recent interaction, management also clarified that they have not used any asset classification exceptions granted by RBI in their J&K SME/ working capital book and do not expect mediumterm NPAs to inch up in their J&K SME book. However, 7.3 bn of restructuring in Q3FY13 was high.

Source : Equity Bulls

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