ICICIdirect.com is bullish on Jammu and Kashmir Bank (JK Bank) and has recommended buy rating on the stock with a target of Rs 1700 in its August 15, 2014 research report.
"J&K Bank's PAT of Rs 130 crore (plunging 57% YoY) came in below our estimate mainly dragged by higher provisions and lower NII (down 2.4% YoY) at Rs 637 crore vs. Rs 720 crore (I-direct estimate). GNPA surged to Rs 1888 crore (GNPA – 4.16% vs. 1.66%) from Rs 783 crore while NNPA rose by Rs 886 crore QoQ to Rs 968.5 crore (NNPA – 2.18% vs. 0.22%). One big agriculture account (~Rs 700 crore) and one real-estate account (~Rs 270 crore) slipped into NPA causing the stress. RA reduced to Rs 1400 crore vs. Rs 1570 crore in Q4FY14. PCR declined to 55.08% vs. 90% due to large NPA accretion. Excluding provision for aforesaid NPA, PCR was upwards of 75%. Credit grew at a modest pace of 11.5% YoY (I-direct estimate: 18%) to Rs 44430 crore. Deposits grew a meagre 8.6% YoY to Rs 63652 crore as on Q1FY15 vs. 15% expected."
"J&K Bank has steadily improved its NIM from ~3% in FY10 to consistent 4%. The bank earns 6%+ NIM within J&K and sub 3% NIM outside J&K. A further improvement in the CD ratio from 66.9% in FY14 to 69.6% in FY16E and faster credit growth within J&K (high yielding portfolio) shall enable J&K Bank to maintain its NIM at 4%+ level. Steady credit growth and healthy NIM will support NII CAGR of 14.4% from Rs 2685 crore in FY14 to Rs 3511 crore in FY16E. Subsequently, PAT is estimated to grow at 14% CAGR from Rs 1183 crore in FY14 to Rs 1527 crore in FY16E. Large corporate (mostly AAA) comprises 84% of credit portfolio outside J&K and almost 50% of total credit of J&K Bank. Asset quality issues are significantly low in this segment. Within J&K, 34% are personal loans wherein majority are salaried account with the bank. Hence, NPA risk is relatively low. For loans outside J&K there were two chunky accounts (Rs 1000 crore total) that added to NPAs in Q1FY15. The bigger agriculture account is in CDR and may get upgraded in the coming quarters. GNPA, hence, is estimated to rise from Rs 783 crore in FY14 to Rs 1614 crore in FY16E with NNPA manageable at Rs 631 crore (1% of credit) in FY16E."
"Post the recent correction, the stock is trading at reasonable valuations of 1x FY16E ABV. It consistently earns lucrative return ratios with RoA of 1.5%+ and RoE of 20%+ except for this one-off NPAs in FY15. Besides, it is adequately capitalised for future growth with tier 1 ratio of 11.5%. Its dividend payout is healthy at ~20% and dividend yield of 3.3%. We maintain our target price of Rs 1700 valuing the bank at 1.2x FY16E ABV and recommend BUY on the stock. We believe the current correction offers an opportunity to enter the stock from a long term perspective," says ICICIdirect.com research report.
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