Jammu & Kashmir Bank - Well positioned in the current scenario - ElaraCapital

Higher provisioning hurts profitability marginally

While top-line remained strong with NII growth of 23%, margins at 4.07%, and PPoP growth of 29% (other income included profits from Metlife stake sale at INR 700 mn), higher provisions hurt profitability to some extent with PAT growth of 20% YoY as the bank chose to provide 90% for the two corporate slippages this quarter. Despite falling yield on advances backed by lending rate cuts, NIMs remain stable sequentially on the back of higher yield on investments. A strong J&K state economy continued to support strong credit growth in the state at 26% YoY and 6% sequentially. Tier 1 capital currently stands at 10.8%. Despite a high dividend payout this year, the bank may not need any capital for the next two years.

Restructured portfolio comes off; asset quality stable

With strong repayments this quarter, restructured book came off by INR 5 bn sequentially and now stands at 3.7% of the credit (from 5.5% last quarter). Gross and net NPAs continue to be stable on a sequential basis at 1.62% and 0.14% respectively, with slippages for the year at 1.36% and credit costs at 44 bps, amongst the best in industry. In order to maintain coverage levels at ~90%, the bank provided 68% on the slippages this quarter compared to ~30% regular run-rate.

Valuations: Earnings trajectory remains strong

We continue to like the stock on the back of its high return ratios (1.7% ROA and 24% ROE for FY13), low leverage, strong liability franchise, clear monopoly in corporate lending in the region so far, no capital requirements over the next 2 years and improving state economy. We don't rule out a re-rating for the stock as the bank enters its high growth phase with strong earnings trajectory. We arrive at a PT of INR1,800 based on residual income model, implying a FY15 P/Adj BV of 1.25, relative to historical average of 1 yr forward Adj P/B of 1.1. The stock currently trades at 1.1 and 0.95 times FY14 and FY15 P/Adj BV respectively.

Source : Equity Bulls

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