Jammu & Kashmir Bank (JAMKAS) 64

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1 [ [ Result Update Rating matrix Rating : Buy Target : 75 Target Period : 12 months Potential Upside : 17% What s changed? Target Changed from 68 to 75 EPS FY17E Changed from 12.9 to (1.4) EPS Changed from 19.3 to 1.9 Rating Changed from Hold to Buy Quarterly performance YoY QoQ NII Other income PPP PAT Key financials Crore FY15 FY16 FY17E NII 2,651 2,79 2,649 3,5 PPP 1,836 1,667 1,524 1,779 PAT (53) 527 Valuation summary FY15 FY16 FY17E P/E Target P/E (7.2) 6.9 P/ABV Target P/ABV RoA RoE (8.1) 8.5 Stock data Market Capitalisation 312 Crore GNPA () 5683 Crore NNPA () 3236 Crore NIM () 3.37% 52 week H/L 92 /55 Net worth 5844 Crore Face value 1 DII Holding 9.6 FII Holding 16.2 Price performance 1M 3M 6M 12M J&K Bank Federal Bank Yes Bank Research Analyst Kajal Gandhi kajal.gandhi@icicisecurities.com Vishal Narnolia vishal.narnolia@icicisecurities.com Vasant Lohiya vasant.lohiya@icicisecurities.com Balance sheet sanitizing encouraging December 19, 216 Jammu & Kashmir Bank (JAMKAS) 64 Bank reported loss at 62 crore in vs. our estimate of profit of 11 crore, primarily led by higher provision during the quarter. Led by unrest in J&K state impacting borrowers ability to repay, asset quality deteriorated in, with highest net GNPA addition at 968 crore. Consequently, absolute GNPA increased to crore (GNPA: 11.33% vs. 9.31% in ). NNPA increased to 3236 crore from 323 crore QoQ. Provision increased at 992 crore; highest ever in the past, led by higher slippages. In, one account with exposure of crore, has been restructured under S4A scheme. RA doubled QoQ at 5713 crore; 12% of advance Credit growth remained subdued at 4% YoY to crore; below our estimate of 11.1% YoY growth. Led by demonetization, deposits fared better with 11.9% YoY growth to crore Dominant position in J&K state on both deposits, credit front The bank dominates its home state with ~65% market share (both deposit and credit). Similarly, ~77% of the bank s deposit is funded from J&K that guards the bank, to a certain extent, from deposit pricing competition. Within J&K, the bank has ~53% CASA ratio and earns lucrative NIM of 6%+ in the state. About 49% of credit exposure is within J&K wherein it earns yields of ~13% compared to sub-12% outside J&K. Slowdown in J&K state led to recent moderation in credit off-take at 4%. Going ahead, we expect credit offtake to remain moderate at 11.3% CAGR in FY17-18E to crore. Slippages to keep reported NIM benign at ~ %in FY17-18E J&K Bank has steadily improved its NIM from ~3% in FY1 to a consistent 4%. The bank earns 6%+ NIM within J&K and sub 3% NIM outside J&K. Moderation in credit off-take and higher slippages is expected to keep calculated margin benign in the near term at ~3.5% in FY17E. In, as pace of slippages moderates and CD ratio inch to normalised level of ~7%, calculated NIM is expected to inch up closer to ~ %. Higher slippages erode PAT in ; some pains still left Large corporate (mostly AAA) comprises 82% of credit portfolio outside J&K and ~51% of total credit of J&K Bank. Asset quality issues are significantly low in this segment. Within J&K, 35% are personal loans wherein majority are salaried account with relatively low risk. Slowdown in J&K state and corporate slippages has led to surge in stressed asset accretion at ~23.3%. With balance sheet clean up in focus, Management has indicated continuance of asset quality woes in 2HFY17E. We expect GNPA at 6388 crore (1.3% of credit) & NNPA at 3865 crore by. Balance sheet sanitizing encouraging; upgrade from Hold to Buy Recent slowdown in J&K state, wherein it has dominant position, and corporate slippage has led to moderation in credit growth as well as increased stressed asset accretion. Going ahead, deposit growth is seen to remain healthy, while credit off-take is expected to pick up from. While stressed asset accretion need be watched for; Management s effort and focus to clean up balance sheet remains encouraging. Though, we have halved our PAT estimates led by credit growth moderation and higher credit cost, healthy recovery is anticipated. Therefore, we revise our target price upwards at 75 from 68, assigning higher multiple at 1.4x P/ABV (.74x earlier). Consequently, we revise our rating on the stock from Hold to Buy. ICICI Securities Ltd Retail Equity Research

2 [[ Variance analysis E YoY QoQ Comments NII Dip in NII led by subdued credit off-take and higher slippages during the quarter NIM bps bps Higher NPA accretion led to margin erosion Other Income Net Total Income Staff cost Other Operating Expenses PPP PPP came lower led by lower NII during the quarter Provision Highest provision led by surge in slippages during the quarter PBT ,831.1 Tax Outgo PAT ,732.9 Bottom-line slipped in red led by higher provision Key Metrics GNPA 5,683. 4, , , GNPA increased at 5683 crore, led by higher slippages at 164 crore compared to 1377 crore in NNPA 3, ,93.5 1, , Total Restructured assets 5, , , , Restructured assets surged at 12% vs 6.6% QoQ, led by unrest in state [ Change in estimates FY17E ( Crore) Old New % Change Old New % Change Comments Net Interest Income 2,825 2, ,267 3,5-8. Pre Provision Profit 1,732 1, ,75 1, NIM bps bps Higher slippages anticipated to keep margin lower PAT Downward revision in PAT estimates led by higher slippages ABV ( ) Assumptions Current Earlier FY15 FY16 FY17E FY17E Credit growth Deposit Growth CASA ratio NIM Calculated Higher slippages anticipated to keep margin lower Cost to income ratio GNPA ( crore) 2, , ,14.9 6, , ,199.9 GNPA estimate revised upwards led by higher slippages NNPA ( crore) 1, , ,64.1 3, , ,142.1 Slippage ratio Unrest in J&K and corporate slowdown to keep slippages elevated Credit cost ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Exhibit 1: CD ratio to remain lower Credit growth to moderate; faster growth estimated within J&K Historically, the bank s credit growth has been sluggish with mere 11.3% CAGR from 178 crore in FY7 to crore in FY11. However, the decision turned out to be in favour of J&K Bank as majority of the banks that disbursed credit aggressively during this period grappled with asset quality issues. Post FY11, the management has steadily picked up its credit pace to grow at 21% CAGR from crore in FY11 to crore in FY14. In FY15, the bank de-grew 4% to crore owing to occurrence of flood in the state and slowdown in credit offtake. In FY16, credit growth has revived at 12.6% YoY to 5193 crore. In, credit growth remained sluggish led by unrest in J&K state as well as demonetization at 4% YoY at crore; wherein J&K comprises ~49.7% of credit while the rest of India comprises balance 5.3%. Under-penetrated market of credit to apple grower, expected rise in investment activity, etc, is expected to support strong credit growth momentum within J&K. There are almost 3,, apple growers within J&K and only 1,-2, avail bank credit. The management has indicated the bank can generate 5-8 crore of credit from this segment. Exhibit 2: Geographical break-up of credit ( crore) FY15 FY16 FY17E ( crore) FY Within J&K FY Outside J&K FY17E Advances Deposits CD ratio (RHS) In, credit growth remained sluggish at 4% YoY at crore, while deposits growth came in higher at 11.9% YoY to crore, led by demonetization. Gross credit within J&K grew 5.5% YoY to crore, while credit in rest of India grew 9.2% YoY to 256 crore. Exhibit 3: Sectoral break-up of credit within J&K state Exhibit 4: Sectoral break-up of credit outside J&K state Q1FY14 Q2FY14 Q3FY14 FY14 Q4FY15 Q4FY16 Q2FY14 Q3FY14 FY14 Q4FY15 Q4FY16 Agriculture Trade Personal SME Corporate Others Corporate Agriculture Trade Personal SME Others Going ahead, we expect credit offtake to remain moderate at 11.3% CAGR in FY17-18E to crore. The credit book within J&K is ICICI Securities Ltd Retail Equity Research Page 3

4 estimated to grow at a higher pace of 15-16% CAGR (FY17-18E) constituting >5% of the overall book. Slippages to keep reported NIM benign at ~ %in FY17-18E The bank consistently earns >3.5% NIM, which is among the best in the industry. Elevated NIM of 6%+ within J&K provides a boost to the overall NIM of the bank. Superior CASA ratio of ~53%, within J&K and dominating position with 65% market share on both deposit and credit enables the bank to earn such lucrative NIM of 6%+. In, higher slippages and incremental credit to higher rated corporate led to ~65 bps YoY decline in margins to 3.37%. Going ahead, the management has maintained its guidance of margins at % in FY17E. Moderation in credit off-take and higher slippages is expected to keep calculated margin benign in the near term at ~3.5% in FY17E. In, as pace of slippages moderates and CD ratio inch to normalised level of ~7%, calculated NIM is expected to inch up closer to ~ % range. However, some pressure on margins related to interest reversals led by higher slippages and addition to restructured assets cannot be ruled out. Exhibit 5: NIM to moderate at % FY17-18E 14 Led by slippages and moderate credit off-take, NIMs expected to remain benign at ~3.5% FY14 FY15 FY16 FY17E NIM Yield on advances Cost of deposit All are calculated figures Exhibit 6: CASA ratio maintained above 4% ( crore) FY15 FY16 FY17E Saving deposits Total deposits SA proportion (RHS) CASA proportion (RHS) Post slow accretion in deposits in previous quarters, it has grabbed pace owing to demonetization led inflows. We estimate deposit growth to ICICI Securities Ltd Retail Equity Research Page 4

5 remain ahead of advanced at CAGR of 12.9% in FY17-18E to crore by. Other income growth to remain in single digit Other income growth remained muted at 4% YoY led by 29.1% decline in fee income at 34.8 crore during the quarter. Trading gains were at 46.7 crore in, up 2.3% YoY. Muted growth in fee income was offset by 42.4% YoY growth in miscellaneous income to 42 crore. With balance sheet cleaning remaining in focus, plan to divest stake in MetLife has taken a back seat. Consequently, near term windfall from sale of investment is ruled out. Apart from any exceptional gains, we expect non-interest income growth to remain in single digit at 7.3% CAGR in FY17-18E to 581 crore. Exhibit 7: Muted traction in non interest income ( crore) Q4FY15 Q4FY16 cost. Trading income Miscellaneous income Other income as % of total income Other income as % of total income Other income as % of total income Exhibit 8: CI ratio to remain at 5-52% in FY17-18E Cost income ratio to remain steady at 5-52% in FY17-18E FY12 FY13 Q1FY14 Q2FY14 Q3FY14 FY14 FY15 Q4FY16 FY17E Cost to income ratio ICICI Securities Ltd Retail Equity Research Page 5

6 Higher slippages erode PAT in ; some pains still left With unrest in J&K state impacting borrowers ability to repay, slippages continued to remain higher in at 162 crore vs crore in ( 2-3 crore run rate seen in prior quarters). Therefore, GNPA increased to crore vs crore in while NNPA jumped QoQ to 3236 crore vs. 323 crore. GNPA, NNPA ratios were at 11.33%, 6.81%, respectively. With respect to unrest in J&K state and its impact on the repayment capacity of the borrowers, special dispensation has been provided by RBI allowing restructuring of loans till December 217 at lower interest rates, Additional sanction up-to 2% of existing loan is also allowed. Consequently, restructured assets has surged QoQ to 5713 crore (12% of credit) from 3247 crore (6.6% of credit). The bank has assets worth ~ 382 crore under 5/25 scheme and ~ 325 crore under strategic debt restructuring. The bank in classified one big agriculture account amounting to 68 crore as NPA. As per the management, the account had a consortium lending from 21 banks of which only four had classified it as NPA, one of them being J&K Bank. In Q4FY15, RBI classified the account under fraud category, which led the bank to provide higher provision of 297 crore in Q4FY15. The bank has made provision to the extent of 544 crore against the same. With balance sheet clean up in focus, Management has indicated continuance of asset quality woes in 2HFY17. Consequently, credit cost is also seen to remain elevated. Going ahead, we expect pace of stress asset accretion to continue in 2HFY17, before moderating in. Therefore, provision expense is expected to remain high owing to stress accretion and ageing of assets. We expect GNPA at 6388 crore (1.3% of credit) and NNPA at 3865 crore (6.2% of credit) by. Exhibit 9: Stressed assets accretion remained higher in ( crore) FY14 FY15 FY16 FY17E Gross NPA Net NPA GNPA ratio NNPA ratio ICICI Securities Ltd Retail Equity Research Page 6

7 Exhibit 1: Restructured assets increase from 6.6% to 12% QoQ of total credit ( crore) Q2FY14 Q3FY14 Q4FY14 Q4FY15 Q4FY16 Restructured assets (RA) RA as a % of advances (RHS) Return ratios to remain subdued in FY17E Exhibit 11: Trend in return ratios RoA to remain under pressure in FY17E; improvement expected in FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17E RoE RoA (RHS) Exhibit 12: Adequately capitalised for growth Q3FY14 Q4FY14 Q4FY15 Q4FY16 Capital adequacy ratio Tier I ratio ICICI Securities Ltd Retail Equity Research Page 7

8 Outlook and valuation J&K Bank s inherent strength in terms of its dominant position in J&K state remains intact. Recent unrest in J&K state has led to moderation in credit growth as well as increased stressed asset accretion which has impacted the operational performance. Going ahead, deposit growth is seen to remain healthy, while credit off-take is expected to pick up from. While stressed asset accretion need be watched for; Management s effort and focus to clean up balance sheet remains encouraging. We have halved our PAT estimates led by credit growth moderation and higher credit cost. With anticipation of healthy recovery, we revise our target price upwards at 75 from 68, assigning higher multiple at 1.4x P/ABV (.74x earlier). Consequently, we revise our rating on the stock from Hold to Buy. Exhibit 13: Valuation NII Growth PAT Growth P/E ABV P/ABV RoA RoE ( cr) ( cr) (x) ( ) (x) FY15 2,651 (1.3) 59 (57) FY16 2, (18) FY17E 2,649 (2.2) (53) (221) (6.2) (.6) (8.1) 3, (25) ICICI Securities Ltd Retail Equity Research Page 8

9 Recommendation History vs. Consensus ( ) Nov-14 Jan-15 Mar-15 Jun-15 Aug-15 Nov-15 Jan-16 Apr-16 Jun-16 Aug-16 Nov-16. Price Idirect target Consensus Target Mean % Consensus with BUY Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Event FY2 Ties up with Metlife for foray in insurance sector, launches J&K Bank - Amex co-branded credit card in agreement with American Express Bank FY3 Dr Haseeb Drabu - consultant to the Economic Advisory Council of PM, Economic Advisor to J&K government appointed as director of bank FY4 The bank launches global access card (an international debit card) in association with Mastercard International FY7 Receives approval from RBI for increasing FII holding, ties up with Kotak Mutual Funds Oct-1 Mushtaq Ahmad appointed Chairman and CEO. He joined the bank in 1972 as probationary officer Sep-12 J&K Bank planning to sell its Metlife stake comes in public domain post which the stock rallies significantly Nov-12 NIM and RoA of bank scales new highs of 3.9% and 1.8%, respectively. Stock continues to rally north FY13 Steady stock appreciation during FY9-13 as dividend/share increased from 16.9 to 5 along with steady and healthy PAT CAGR of 26.7% May-13 PAT of 25 crore disappoints as couple of accounts slip to NPA leading to higher provision. Also, 7 crore profit in metlife stake sale was included. Jul-13 RBI hikes MSF rates and tightens liquidity by various measures. However, J&K Bank has fallen relatively less as it has a much stabler business model May-14 Local daily reports some stress on asset, which was later on classified as NPA in Sep-15 Subdivision of shares of face value of 1 each into equity shares of 1 each Top 1 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Government of Jammu & Kashmir 3-Sep ICICI Prudential Asset Management Co. Ltd. 3-Sep Life Insurance Corporation of India 3-Sep Birla Sun Life Asset Management Company Ltd. 3-Sep Norges Bank Investment Management (NBIM) 3-Sep Dimensional Fund Advisors, L.P. 3-Sep The Vanguard Group, Inc. 3-Sep Reliance Nippon Life Asset Management Limited 3-Sep Fidelity Management & Research Company 3-Sep Excel Funds Management Inc. 3-Sep Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Promoter FII DII Others Recent Activity Buys Sells Investor name Value(m) Shares(m) Investor name Value(m) Shares(m) Birla Sun Life Asset Management Company Ltd Grandeur Peak Global Advisors, LLC Norges Bank Investment Management (NBIM) Aberdeen Asset Management (Asia) Ltd Excel Funds Management Inc Fidelity Management & Research (Hong Kong) Limited UTI Asset Management Co. Ltd..8.8 Sanlam Investment Management (Pty) Ltd Mellon Capital Management Corporation.8.7 Morgan Stanley Investment Management Inc. (US) Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 9

10 Financial summary Profit and loss statement Crore (Year-end March) FY15 FY16 FY17E Interest Earned Interest Expended Net Interest Income growth Non Interest Income Fees and advisory Treasury Income /sale of Invt Other income Net Income Employee cost Other operating Exp Operating Income Provisions PBT Taxes Net Profit growth EPS Key ratios (Year-end March) FY15 FY16 FY17E Valuation No. of Equity Shares EPS ( ) BV ( ) BV-ADJ ( ) P/E P/BV P/ABV Yields & Margins Net Interest Margins Yield on avg earning assets Avg. cost on funds Avg. Cost of Deposits Yield on average advances Quality and Efficiency Cost / Total net income Credit/Deposit ratio GNPA NNPA RONW ROA Balance sheet Crore (Year-end March) FY15 FY16 FY17E Sources of Funds Capital Reserves and Surplus Networth Deposits Borrowings Other Liab & Prov (incl sub-debt Total Uses of Funds Fixed Assets Investments Advances Other Assets Cash with RBI & call money Total Growth ratios (% growth) (Year-end March) FY15 FY16 FY17E Total assets Advances Deposits Total Income Net interest income Operating expenses Operating profit Net profit Book value EPS ICICI Securities Ltd Retail Equity Research Page 1

11 ICICIdirect.com coverage universe (Banking) CMP M Cap EPS ( ) P/E (x) P/ABV (x) RoA RoE Sector / Company ( ) TP( ) Rating ( Cr) FY16 FY17E FY16 FY17E FY16 FY17E FY16 FY17E FY16 FY17E Bank of Baroda (BANBAR) Hold 36, Punjab National Bank (PUNBAN) Hold 24, State Bank of India (STABAN) Buy 196, Indian Bank (INDIBA) Hold 11, Axis Bank (AXIBAN) Hold 111, City Union Bank (CITUNI) Buy 7, DCB Bank (DCB) Hold 2, Federal Bank (FEDBAN) 68 8 Hold 11, HDFC Bank (HDFBAN) 1,175 1,5 Buy 293, IndusInd Bank (INDBA) 1,84 1,35 Buy 64, Jammu & Kashmir Bk(JAMKAS) Hold 3, Kotak Mahindra Bank (KOTMAH) Hold 131, Yes Bank (YESBAN) 1,181 1,3 Hold 49, ICICI Securities Ltd Retail Equity Research Page 11

12 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 12

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