Jammu & Kashmir Bank - Improving Fundamentals - Case for Rerating; Reiterate "BUY" - Karvy

Asset Quality Remains Unperturbed amid Economic Slowdown: Contrary to other PSU Banks which are struggling with sharp deterioration in their asset quality, J&K Bank has improved its Gross NPA by 20 bps over last 2 years. Such outperformance can be attributed to superior domain expertise in SME and trade segment within the state of J&K. Majority of personal loan within the State relates to housing and loans to State Government employees against which they hold salary account with the Bank. Even higher economic activity within state of J&K has helped the Bank. For lending outside the state of J&K, the Bank sticks to better rated corporates. In addition to healthy provision coverage >90%, it also has a reasonably lower exposure to difficult sectors that provides us comfort on its asset quality, going ahead.

NIMs are best in class: J&K Bank's NIMs are on upswing, as it has reported NIMs >4% in last four quarters. Higher CASA (39%) and better liability franchise have helped in managing total cost of deposits lower than its peers. Its NIMs have improved on the back of improvement in Credit-Deposit (CD) ratio and tilting its advance portfolio in favor of state of J&K. CD ratio has improved by 600 bps over last 2 quarters to 67%, yet it significantly lower than industry average of 77%, which suggests further scope for expansion. Advance mix within high yielding state of J&K has improved by 400 bps to 43%; its Management plans to reach it at 50% in next 2-3 years.

Superior Return Ratios: The Bank enjoys one of the best RoE & RoA profile compared to its peers, which has consistently improved over past few years on the back of higher NIMs, operational efficiency and lower slippages resulting in lower credit cost.

Outlook & Valuation

We reiterate our "BUY" recommendation on J&K Bank with unrevised target price of Rs. 1755 per share valuing it at 1.3x P/ABV FY15E.

Source : Equity Bulls

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