Stock Market Result Update on Jammu and Kashmir Bank for 2QFY2012

Stock Market Result Update on Jammu and Kashmir Bank for 2QFY2012 with an Neutral recommendation.

For 2QFY2012, J&K Bank reported healthy 22.3% growth in its net profit to `200cr, higher than our expectations, mostly on account of lower provisioning expenses than estimated by us.  Asset quality remained stable; however, CASA ratio weakened by 222bp qoq and slipped to sub-40% levels (38.2%). We recommend a Neutral rating on the stock.

Asset quality remains stable, however margins compress by 13bp sequentially: The bank’s loan book grew sequentially by 6.9% to `28,236cr and deposits increased  significantly by 10.1% qoq to `47,425cr. The CD ratio due to heavy growth in deposits slipped below 60% (59.5% as of 2QFY2012). While CASA deposits grew by healthy 4.0% qoq, the pace was lower than the growth in overall deposits, leading to a 222bp decline in CASA ratio to 38.2%. The bank’s cost of deposits till 1QFY2012 had only risen by 47bp since FY2010. The effect of rising interest rates was finally felt in 2QFY2012 as cost of deposits increased by 79bp qoq to 6.2%. Yield on advances increased by 38bp qoq to 11.8% and yield on investments rose sharply by 90bp to 7.2%; however, the combined effect was not able to fully compensate for the jump in cost of deposits, leading to a 13bp contraction in reported NIM to 3.7%. The bank had already shifted to system-based NPA recognition and, hence, did not see any material rise in its NPA ratios. Gross NPA ratio as of 2QFY2012 stood at 1.9% (2.0% in 1QFY2012) and net NPA ratio stood at 0.2% (0.2% in 1QFY2012). Provisioning coverage ratio including technical write-offs stood at healthy 92.0%.

Outlook and valuation: The stock is trading at 0.9x FY2013E ABV vis-à-vis its historic range of 0.8-1.4x and five-year median of 1.0x. Immediate levers in the form of increased CD ratio from the current low of 59.5% into higher yielding advances are likely to provide near-term higher momentum to NII growth for the bank relative to other mid-size banks. Further, with 38.2% CASA ratio, the bank is more favorably placed than its peers to handle NIM pressures from high deposit rates. On the flip side, a potential move to increase savings deposit rates would impact the bank significantly. Also, the bank’s increasing non-J&K exposure on the asset side poses medium-term concerns. Being amongst the highest outperformers since December 2010, we believe in relative terms, the stock is now fairly priced. Hence, we recommend a Neutral rating on the stock.