JKBK_PL_170914

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Jammu & Kashmir Bank

Will Weather near term headwinds in asset quality!

September 16, 2014

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware tha

the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to important disclosures and disclaimers at the end of the report

Pritesh Bumb

[email protected]

+91-22-66322232

Rating Accumulate

Price Rs149

Target Price Rs185

Implied Upside 24.2%

Sensex 26,817

Nifty 8,042

(Prices as on September 15, 2014)

Trading data

Market Cap. (Rs bn) 72.3

Shares o/s (m) 484.9

3M Avg. Daily value (Rs m) 373.2

Major shareholders

Promoters 53.17%

Foreign 29.37%

Domestic Inst. 3.13%

Public & Other 14.33%

Stock Performance

(%) 1M 6M 12MAbsolute 1.5 1.0 29.3

Relative (1.2) (21.9) (6.6)

How we differ from Consensus

EPS (Rs) PL Cons. % Diff.

2015 22.9 23.8 -3.5

2016 29.1 29.4 -1.1

Price Performance (RIC: JKBK.BO, BB: JKBK IN)

Source: Bloomberg

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Sep-13

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(Rs)

The recent floods in the valley have not only affected daily life in J&K state, bu

also the Banking business. We through this report, try to assess the situation to

Bank credit in the state, with specific attention to J&K bank which has 60% share in

the overall business and is likely to be the worst affected. Although it is early to

assess the quantifiable impact of the floods, we believe that there could possibly be

near term headwinds to asset quality.

Srinagar district The most affected: Asof Q1FY15, ~75% of credit disbursed

are in the flood affected areas in J&K state with Srinagar and Jammu districts

having the lionsshare of ~50%, while the share of credit to the worst affected

areas were ~34% of loans (Exhibit 2). Jammu district is relatively less affected

than Srinagar. Srinagar has mostly tourism related businesses and has exposure

of short term in nature which could have a knock on effect on asset quality

immediately. Although it is early to assess the impact on asset quality, Srinaga

has 4.6% GNPAs (Exhibit 2), while J&K bank being the largest share in J&K state

has lowest GNPAs of 2.3% among the three large banks as at Q1FY15 (Exhibit 3).

J&K bank most affected but regulatory relief to come in: J&K banks B/s

remains highly concentrated in J&K state with ~69% deposits and ~45% loans

(Exhibit 1). Immediate impact on asset quality could be limited as only ~35% of

J&K Banks advances & deposits remain below tenure of 12 months and could

be possibly recognized upfront which mostly are in Agri, Trade and Persona

segments (largely unsecured). J&K Banks management believes flooding in the

state is a national disaster and would be provided regulatory relief on loans

mostly by dispensation in NPA recognition and restructuring of loans on easie

terms. SBI, PNB (~19% of Biz) and other banksoverall asset quality will not see

material impact on lower concentration to J&K state compared to their B/s size.

Remain positive despite near term head winds: We believe that NIMs/ROAs fo

J&K Bank will likely moderate on asset quality pressures and distorted normalcy

of payment schedules. Though non-J&K book possess threat of additional stress

to asset quality, we believe J&K bank has navigated well through economic

challenges by displaying best in class ROA/ROEs of 1.5%/20%. P/ABV remains

reasonably undemanding at 1x FY16E we retain Accumulatewith TP of Rs185.

Key financials ( Y/e March) 2013 2014 2015E 201

Net interest income (Rs m) 23,160 26,845 30,287 36,3

Growth (%) 26.0 15.9 12.8 20

Operating profit (Rs m) 18,108 18,998 20,391 24,54

PAT (Rs m) 10,551 11,825 11,124 14,0

EPS (Rs) 21.8 24.4 22.9 29

Growth (%) 31.4 12.1 (5.9) 26

Net DPS (Rs) 5.0 5.0 5.0 5

Profitability & Valuation 2013 2014 2015E 201NIM (%) 3.51 3.57 3.53 3.

RoAE (%) 23.6 22.3 18.1 19

RoAA (%) 1.60 1.57 1.30 1.4

P / BV (x) 1.5 1.3 1.1 0

P / ABV (x) 1.5 1.3 1.2 1

PE (x) 6.9 6.1 6.5 5

Net dividend yield (%) 3.4 3.4 3.4 3

Source: Company Data; PL Research

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September 16, 2014 2


Exhibit 1:

Bank wise Deposit and Advances in J&K State. J&K Bank has high share followed

by SBI & PNB, while other banks have negligible share

Source: J&KSLBC, PL Research

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Exhibit 2: ~75% of J&K advances of Banks in flood affected areas but only ~34% ofadvances in worst affected areas


Exhibit 3: Despite being the biggest in J&K state J&K Bank has the lowest NPA ratio

displaying its better relationship with borrowers

Bank Advances GNPA % GNPAJ&K 198,437 4,662.2 2.3%

SBI 50,032 1,856.5 3.7%

PNB 15,305 1,583.4 10.3%

J&K State 302,056 14,719.8 4.9%


As of Q1FY15 (Rs m)

District Advances% of J&K State

Advances

GNPA % GNPA

Srinagar 81,219 26.9% 3,742.6 4.6%

Jammu 72,921 24.1% 5,272.8 7.2%

Baramulla 21,557 7.1% 955.7 4.4%

Anantnag 16,750 5.5% 386.1 2.3%

Kathua 12,569 4.2% 608.9 4.8%

Pulwama 12,444 4.1% 274.6 2.2%

Samba 11,757 3.9% 827.0 7.0%

Budgam 11,205 3.7% 297.0 2.7%

Kupwara 8,938 3.0% 436.0 4.9%

Udhampur 6,971 2.3% 361.9 5.2%Shopian 6,612 2.2% 79.4 1.2%

Kulgam 5,441 1.8% 89.2 1.6%

Rajouri 5,283 1.7% 219.0 4.1%

Ganderbal 4,900 1.6% 218.0 4.4%

Bandipora 4,262 1.4% 137.6 3.2%

Reasi 3,751 1.2% 109.4 2.9%

Leh 3,744 1.2% 89.3 2.4%

Poonch 3,038 1.0% 331.2 10.9%

Doda 2,951 1.0% 71.9 2.4%

Kargil 2,118 0.7% 61.2 2.9%

Ramban 1,867 0.6% 88.9 4.8%

Kishtwar 1,759 0.6% 62.1 3.5%

Flood affected 227,825 75.4% 11,156.9 4.9%

Worst affected 102,452 33.9% 4,757.8 4.6%

J&K State 302,056 14,719.8 4.9%

Advances:

Srinagar district has largest share of credit

followed by Jammu which combined is

~50% of advances.

Credit to the flood affected districts

comprises mainly of Agri, Trade and SME

advances. The corporate advances would

be largely to Srinagar & Jammu districts

Asset Quality:

Jammu district is comparatively less

affected than Srinagar. Despite Srinagars

share being highest in advances its GNPAs

are below J&K states GNPAs and hasonly

~25% share in GNPAs. We believe RBI

would provide short term relief to Banks

exposures to flood affected areas mostly by

restructuring loans of short term into long

term and working capital loans into term

loans. Also RBI may allow elongated

recognition of dues which may help asset

quality.

Some relief package could also be

announced by Central and State Govt but

would take place after assessing situation

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Exhibit 4:

J&K bank advances portfolio in J&K state. Agri, Trade & Personal portfolio wil

have immediate impact while corporate advances to have lower impact

Agri

20%

Trade

15%

Personal

30%

SME

14%

Corporate

19%

Others

2%

Source: Company Data, PL Research

Impact of ratios to be short term: Asset quality pressures likely would increase

credit costs and impact NIMs (on interest reversals) also impacting profitability

in the near term. Although it is early to assess the impact on financials there

could be slight blip in ROA/ROEs but would return to back as growth prospects

remain high in J&K state with higher yields. While credit costs will ease if non-

J&K book performs well improving return ratios

Exhibit 5: We factor in ~80bps credit cost in FY15E, but could increase as we seek more

clarity on asset quality

0.30%0.35%

0.68%

0.59%

0.47%

0.56%

0.30%

0.79%

0.63%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

2008 2009 2010 2011 2012 2013 2014 2015E 2016E

Credit Cost


Agri, Trade and Personal loan portfolio

which is ~65% of loan exposure to J&K

state will be affected immediately in near

term as the natural calamity will affect the

daily wage earners and tourism related

sectors

We believe there will be regulatory easing

for these loans as it may provide incentives

to J&K Bank in terms of PSL target

requirements and NPA recognition but

Banks balance sheet will be impacted for

the next 2 quarters

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Exhibit 6:

Some blips in ROA/ROEs in FY15E as asset quality risks now from both J&K and

Non-J&K book

ROA decomposition 2010 2011 2012 2013 2014 2015E 2016E

NIM/Assets 2.85% 3.39% 3.39% 3.58% 3.65% 3.62% 3.69%

Fees/Assets 0.62% 0.60% 0.55% 0.52% 0.44% 0.45% 0.44%

Inv. Profits/Assets 0.44% 0.20% 0.07% 0.23% 0.09% 0.09% 0.08%

Net revenues/Assets 3.91% 4.19% 4.00% 4.32% 4.18% 4.16% 4.20%

Opex/Assets -1.47% -1.67% -1.48% -1.53% -1.60% -1.72% -1.72%

Provisions/Assets -0.43% -0.47% -0.31% -0.44% -0.20% -0.48% -0.39%

Taxes/Assets -0.71% -0.70% -0.73% -0.73% -0.77% -0.63% -0.67%

Costs/Assets -2.61% -2.84% -2.52% -2.69% -2.57% -2.83% -2.78%

ROA 1.30% 1.35% 1.48% 1.63% 1.61% 1.33% 1.43%

Equity/Assets 7.17% 7.13% 6.97% 6.92% 7.20% 7.33% 7.22%

ROE 18.2% 19.0% 21.2% 23.6% 22.3% 18.1% 19.8%

RORWA 2.43% 2.29% 2.40% 2.61% 2.49% 2.00% 2.13%


Exhibit 7:

We retain our accumulate rating with TP of Rs185

Risk free rate 8.0%

Equity Risk Premium 6.0%

Beta 1.25

Cost of Equity 15.5%

Terminal growth 5.0%

Normalised ROE 17.4%

Stage 2 growth 12.0%

Mar-15 PT (incl. Metlife value) 185

Implied Mar-16 P/B 1.02

Implied Mar-16 P/E 5.6

Remaining MetLife stake 23.3


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Income Statement (Rs m)

Y/e March 2013 2014 2015E 2016E

Int. Earned from Adv. 43,176 50,213 56,810 66,419

Int. Earned from Invt. 17,226 16,856 19,204 22,587

Others 966 602 602 602

Total Interest Income 61,368 67,670 76,616 89,608

Interest expense 38,208 40,825 46,330 53,267NII 23,160 26,845 30,287 36,340

Growth (%) 26.0 15.9 12.8 20.0

Treasury Income 1,493 636 750 750

NTNII 3,344 3,266 3,776 4,365

Non Interest Income 4,837 3,903 4,526 5,115

Total Income 66,205 71,573 81,142 94,723

Growth (%) 28.1 8.1 13.4 16.7

Operating Expense 9,890 11,750 14,422 16,909

Operating Profit 18,108 18,998 20,391 24,546

Growth (%) 32.1 4.9 7.3 20.4

NPA Provisions 2,011 1,274 4,031 3,822

Investment Provisions 149

Total Provisions 2,842 1,477 4,031 3,822PBT 15,266 17,520 16,360 20,725

Tax Provisions 4,715 5,696 5,235 6,632

Effective Tax Rate (%) 30.9 32.5 32.0 32.0

PAT 10,551 11,825 11,124 14,093

Growth (%) 31.4 12.1 (5.9) 26.7

Balance Sheet (Rs m)

Y/e March 2013 2014 2015E 2016E

Par Value 1 1 1 1

No. of equity shares 485 485 485 485

Equity 485 485 485 485

Networth 48,647 57,236 65,523 76,777

Adj. Networth 48,094 56,216 60,310 71,383

Deposits 642,206 693,359 826,484 970,662Growth (%) 20.4 8.0 19.2 17.4

Low Cost deposits 251,910 270,833 322,833 379,150

% of total deposits 39.2 39.1 39.1 39.1

Total Liabilities 717,433 786,197 928,681 1,089,438

Net Advances 392,004 463,846 551,977 656,852

Growth (%) 18.5 18.3 19.0 19.0

Investments 257,411 261,951 304,616 348,294

Total Assets 717,433 786,197 928,681 1,089,438

Source: Company Data, PL Research.

Quarterly Financials (Rs m)

Y/e March Q2FY14 Q3FY14 Q4FY14 Q1FY15

Interest Income 16,497 17,155 17,775 17,68

Interest Expense 9,679 10,689 10,763 11,30

Net Interest Income 6,818 6,466 7,012 6,377

Non Interest Income 995 875 1,111 1,310

CEB 901 736 901 1,030Treasury

Net Total Income 7,813 7,340 8,123 7,687

Operating Expenses 2,848 2,932 3,308 3,21

Employee Expenses 1,768 1,878 2,037 2,060

Other Expenses 1,081 1,054 1,271 1,15

Operating Profit 4,965 4,408 4,814 4,475

Core Operating Profit 4,964 4,408 4,815 4,475

Provisions 557 (46) 606 2,468

Loan loss provisions 494 4 619 2,340

Investment Depreciation 63 (50) (13) 128

Profit before tax 4,408 4,454 4,209 2,008

Tax 1,381 1,242 1,703 707

PAT before EO 3,027 3,213 2,506 1,30Extraordinary item

PAT 3,027 3,213 2,506 1,30

Key Ratios

Y/e March 2013 2014 2015E 2016

CMP (Rs) 149 149 149 149

Equity Shrs. Os. (m) 485 485 485 485

Market Cap (Rs m) 72,278 72,278 72,278 72,27

M/Cap to AUM (%) 10.1 9.2 7.8 6.

EPS (Rs) 21.8 24.4 22.9 29.

Book Value (Rs) 100 118 135 158

Adj. BV (75%) (Rs) 101 118 129 153

P/E (x) 6.9 6.1 6.5 5.

P/BV (x) 1.5 1.3 1.1 0.9P/ABV (x) 1.5 1.3 1.2 1.0

DPS (Rs) 5.0 5.0 5.0 5.0

Dividend Yield (%) 3.4 3.4 3.4 3.4

Profitability (%)

Y/e March 2013 2014 2015E 2016

NIM 3.5 3.6 3.5 3.

RoAA 1.6 1.6 1.3 1.4

RoAE 23.6 22.3 18.1 19.

Efficiency

Y/e March 2013 2014 2015E 2016

Cost-Income Ratio (%) 35.3 38.2 41.4 40.8

C-D Ratio (%) 61.0 66.9 66.8 67.

Business per Emp. (Rs m) 99 96 99 10

Profit per Emp. (Rs lacs) 10.1 9.8 8.0 8.8

Business per Branch (Rs m) 1,427 1,388 1,438 1,47

Profit per Branch (Rs m) 15 14 12 13

Asset Quality

Y/e March 2013 2014 2015E 2016

Gross NPAs (Rs m) 6,438 7,834 14,894 17,983

Net NPAs (Rs m) 553 1,020 5,213 5,39

Gr. NPAs to Gross Adv. (%) 1.6 1.7 2.7 2.

Net NPAs to Net Adv. (%) 0.1 0.2 0.9 0.8

NPA Coverage (%) 91.4 87.0 65.0 70.

Source: Company Data, PL Research.

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