Buy Jammu & Kashmir Bank (J&K Bank)

We visited Jammu & Kashmir with a twin objective of doing a dip-stick on the business confidence in the state (incidentally the state has seen the highest influx of tourists recently) and to check whether the bank’s monopoly status is under any threat with more banks establishing a presence in the region. Apart from the J&K Bank’s management, we met a cross section of J&K Bank’s corporate and SME borrowers.

Signs of improving regional economy

Contrary to the rest of Indian economy, the region’s GDP has improved over the last two years and the demand for credit is set to get better on improved business confidence and increased tourist inflows. J&K Bank estimates ~30-35% credit growth in the region for FY13 on an improving regional economy. Also, horticulture lending is likely to see a huge fillip after the recent extension of agriculture
interest subvention to J&K Bank. We peg our estimates at 25% growth in FY13 for J&K Bank.

Regional stronghold unchallenged

Apart from the J&K Bank’s deep understanding of the region’s borrowers, customers have a strong connect with the bank developed over years of conflict and stress in the region. Article 370 of the Indian
Constitution, which disallows non-residents from owning land or property in J&K, acts as a deterrent for competing banks in extending credit in the state in a big way. We have also seen little traction for
other banks on the corporate banking side.

Underpriced despite strong price performance

We believe J&K Bank in uniquely poised on many counts where the industry faces stress including weak economic growth projections affecting credit growth, slower deposit growth on low/negative real
interest rates (the bank has a CD ratio of 62% relative to industry average at 76%), tepid capital markets affecting capital raising (well capitalized with 11% Tier I and no requirements over the next two
years), high cost of funds (amongst very few banks that have had CASA stability over FY12). These factors underpin our confidence in the bank’s ability to outshine other peers in the current difficult environment. We are of the opinion that J&K Bank deserves a premium to its historical multiples, especially as its high growth phase kicks in.

While the J&K Bank stock has been amongst the top quartile of performers in the banking space since we initiated coverage, it still trades below its long-term average multiples despite being at an advantageous position relative to the rest of industry. We maintain our PT of 1200, implying a 1 yr fwd P/AdjBV of 1.15, relative to historical average of 1.1. The stock currently trades at 0.9 times 1 yr fwd P/AdjBV.