At a time when all other analysts were gung-ho about J&K Bank, Kotak bucked the trend and sent an ominous warning.
In a report issued in February 2014, Kotak made it clear that it had serious doubts about J&K Bank. It said:
“The niggling issues persist. We remain puzzled on the movement of restructured loans as there has been a reduction of 15% of Q2FY14 (~33% of FY13) restructured loans….
We remain concerned on the bank’s growth strategy as it focuses on the high-risk agriculture segment within J&K while we retain our cautious outlook on the portfolio outside the state. J&K Bank reported earnings growth of 11% y-o-y, but primarily led by reversal in NPL provisions and lower tax rate.”
Unfortunately, nobody paid attention to the warning. Instead, veteran value investor Sanjoy Bhattacharyya recommened the stock in April 2014 by calling it “incredibly attractive”. Another veteran value investor, Parag Parikh, holds a big chunk of the stock in the PPFAS Mutual Fund.
The reason for the panic today was a report in greaterkashmir.com that J&K Bank had not shown bad/ stressed loans worth about Rs. 2500 crore as a NPA.
The report gave several examples of loans which according to it require to be classified as NPAs. The first is a loan of Rs 650 crore given to a Kolkata-based company. The report states that this company has been declared as a NPA by all other banks but J&K Bank continues to show it as a standard loan. A second instance is of a Mumbai-based real estate company which has taken Rs 400 crore from J&K Bank. The cheques issued by the company have bounced more than once, it said.
Mushtaq Ahmad, CEO of J&K Bank, rushed to deny the news. In an interview to CNBC TV18, he called the news “absurd” and “mischievous”.
However, investors were in no mood to listen to Mushtaq Ahmad or to take any chances. There was a scramble to dump the stock and it went spiraling down 18%.
In these kind of matters, discretion is the better part of valour.
Meanwhile, we have to quietly compliment the research team at Kotak for their perceptive warning.