Jammu & Kashmir Bank - Holding on to their stable performance! - Prabhudas Lilladher

We hosted the management of J&K Bank recently. Near-term performance is expected to remain strong with no large negative surprise on asset quality and a rebound in margins in Q4. Also, stable Advances/Deposit market share for the bank indicates limited impact from expansion by private banks for now. We remain positive on J&K Bank (PT of Rs1700/share) and maintain our 'Accumulate' rating.

- Near-term performance to remain strong: (1) Margins of the bank dipped in Q3 due to some interest reversal and late disbursement in a large account. Hence, NIMs are likely to improve to +4% in Q4 - We expect some moderation in FY15 as rates come off but higher J&K state share (25% YoY growth) will likely aid margins (2) On Asset quality: Management does not see any near-term concerns in their J&K portfolio - Q4FY14 is seasonally weak for asset quality (large write-offs) but management expects lower seasonality this time. On non-J&K portfolio, worries relate to weak macros but management does not see any large negative surprise in the near term.

- Addressing investor concerns: (1) Competition: The Bank's share of J&K state's deposits has been stable at ~68-70% over the last 2-3 years. HDFC Bank (HDFCB) has been able to garner <2% B/s share in J&K (Dec-13) and management indicated that large part of HDFCB's expansion continues to remain in Urban J&K where CASA potential is lower (15% rural branches in J&K for HDFCB v/s ~60% for J&K Bank). (2) Non-J&K portfolio: The bank has some risky exposures like Essar Steel/Aircel (Rs4-5bn each) but near-term concerns have come off in these accounts as they have got re-financed. Our US$75bn study of stressed exposures indicates limited stress excluding these two large exposures and some commercial RE names. (Refer to Page 3 for details on exposure to stressed assets as per MCA).

- Remain Positive but recent outperformance dents return expectations: We inchup our estimates by 3-6% and increase our PT by 10%. We conservatively factor in risk-adjusted margins to come off by ~25bps over FY15-16 but still expect ROEs to remain high at 19-20%. While we remain positive on J&K Bank, upside of ~12%, coupled with low liquidity, restrict our rating to 'Accumulate' (v/s BUY).

Source : Equity Bulls

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