J&K Bank: Angel Broking Research Report

Angel Broking is bullish on Jammu and Kashmir Bank (J&K Bank) and has recommended buy rating on the stock with a target of Rs 987 on the following investment rationale;

Jammu and Kashmir Bank (J&K Bank) registered healthy net profit growth of 19.9% yoy to Rs 168 crore, above our estimate of Rs 121 crore for 3QFY2011, primarily on account of lower-than estimated provisioning expenses. We were conservatively penciling in higher NPA provisions for Jammu and Kashmir Bank (J&K Bank) to create a margin of safety considering the political disturbances in the state of J&K during 9MFY2011.

Jammu and Kashmir Bank (J&K Bank)’s advances showed strong traction with growth of 9.4% qoq and 22% yoy compared to growth of 0.6% qoq and 9.8% yoy in 2QFY2011. The CD ratio improved to 62.1% from 58.4% as of 2QFY2011. Jammu and Kashmir Bank (J&K Bank)’s deposits registered healthy growth of 21.4% yoy. Saving account deposits grew by a strong 29.6% yoy. However, due to reduction in current account deposits overall CASA growth was slower at 16.8% yoy. CASA ratio remained stable ~40% levels. Improvement in CD ratio coupled with higher yield on investments and decline in cost of deposits aided NIM expansion to 3.70% compared to 3.66% in 2QFY2011 and 3.28% in 3QFY2010. Jammu and Kashmir Bank (J&K Bank)’s asset quality improved further with decline in both gross and net NPAs. Gross NPA ratio improved to 1.95% compared to 2.17% in 2QFY2011 and the net NPA ratio improved to 0.04% from 0.13% in 2QFY2011.

The stock of Jammu and Kashmir Bank (J&K Bank) is trading at 0.9x FY2012E ABV vis-à-vis its historic range of 0.8-1.4x and median of 1.1x. We maintain our positive view on the stock of Jammu and Kashmir Bank (J&K Bank) considering the bank’s strong deposit mix, dominant regional market share and healthy track record in asset quality. We believe that this provides sufficient margin of safety from the risks of political disturbances in J&K, especially in light of the bank’s steady performance even during past crises. Even taking into account the inherently lower-than-national average growth (in GDP, deposits, credit) in J&K, at just 0.9x FY2012E P/ABV and with sustainable RoEs of at least 17%, the stock is inexpensive. Hence, we maintain a Buy on the stock, with a target price of Rs 987, implying an upside of 33% from current levels.