Jammu and Kashmir Bank

Transcription

1 1QFY2013 Result Update Banking August 10, 2012 Jammu and Kashmir Bank Performance Highlights Particulars (` cr) 1QFY13 4QFY12 % chg (qoq) 1QFY12 % chg (yoy) NII Pre-Prov. Profit (0.6) PAT Jammu Kashmir Bank (J&K Bank) registered a strong performance on the operating front for 1QFY2013. The reported net profit grew by 35.0% yoy to `246cr which was higher than our estimate on account of higher non-interest income and lower provisioning expenses than estimated by us. Slippages under control: The business growth for the bank remained muted during 1QFY2013, with advances growing by 0.4% qoq and deposits declining by 0.4% qoq. On the liabilities front, the performance on the CASA front was moderate with current bank accounts up by 6.7% yoy and savings bank accounts growing by a healthy 21.8% yoy. However, due to higher term deposits growth, the CASA ratio of the bank declined to 38.7%. The cost of deposits for the bank was higher by 52bp sequentially at 6.9% on account of lower CASA ratio. However, higher incremental lending in the state of Jammu & Kashmir (J&K) led to yield on advances increasing by 22bp to 7.7%. Consequently the decline in reported NIMs was limited at 6bp qoq to 3.8%. The bank s fee income grew by a strong 28.7% yoy on account of healthy performance on both CEB (up 22.9% yoy) and recoveries front (up 44.6% yoy). The treasury segment also performed impressively with income from treasuries doubling on a y-o-y basis. The bank s asset quality remained stable sequentially, with a marginal increase of 6bp in gross NPA ratio to 1.6% and 1bp decline in the net NPA ratio to 0.14%. The slippage levels were under control at `86cr (annualised slippage ratio of 1.0%). The bank s PCR which is the highest in the industry, improved on a sequential basis by 33bp to 94.1%. Outlook and valuation: At the current market price, the stock is trading at 0.8x FY2014E ABV vis-à-vis its historic range of x and eight-year median of 1.0x. Immediate levers in the form of increased CD ratio from the current low of 62.6% to higher yielding advances are likely to provide near-term higher momentum to NII growth for the bank relative to other mid-size banks. The bank also has a higher CASA ratio, capital adequacy and provision coverage than most mid-sized banks. However, with the stock trading at the upper end (0.8x) of the FY2014 P/ABV range for PSU banks ( x), an upside in the stock price from the current levels appears limited and hence we recommend an Accumulate rating on the stock with a target price of `1,026. Key financials (standalone) Y/E March (` cr) FY2011 FY2012 FY2013E FY2014E NII 1,544 1,838 2,241 2,520 % chg Net Profit % chg (1.3) NIM (%) EPS (`) P/E (x) P/ABV (x) RoA (%) RoE (%) ACCUMULATE CMP `924 Target Price `1,026 Investment Period Stock Info 12 months Please refer to important disclosures at the end of this report 1 Sector Banking Market Cap (` cr) 4,477 Beta Week High / Low 1010/645 Avg. Daily Volume 6,915 Face Value (`) 10 BSE Sensex 17,558 Nifty 5,320 Reuters Code Bloomberg Code Shareholding Pattern (%) JKBK.BO JKBK@IN Promoters 53.2 MF / Banks / Indian Fls 3.0 FII / NRIs / OCBs 26.9 Indian Public / Others 17.0 Abs. (%) 3m 1yr 3yr Sensex J&K Bank Vaibhav Agrawal Ext: 6808 vaibhav.agrawal@angelbroking.com Varun Varma Ext: 6847 varun.varma@angelbroking.com Sourabh Taparia Ext: 6872 sourabh.taparia@angelbroking.com

2 Exhibit 1: 1QFY2013 performance (standalone) Particulars (` cr) 1QFY13 4QFY12 % chg (qoq) 1QFY12 % chg (yoy) FY2012 FY2011 % chg Interest earned 1,476 1, , ,836 3, on Advances / Bills 1, ,394 2, on investments ,403 1, on balance with RBI & others Interest Expended ,997 2, Net Interest Income ,838 1, Other income (23.6) (8.4) Other income excl. treasury (35.7) Fee Income (6.5) (2.0) - Treasury Income (61.2) - Others (62.6) Operating income (1.5) ,172 1, Operating expenses (3.1) Employee expenses (0.1) - Other Opex (9.0) Pre-provision Profit (0.6) ,370 1, Provisions & Contingencies (4) (21.3) - Provisions for NPAs (29.7) (30.8) - Provisions for Investments - 4 (100.0) 4 (100.0) (70.0) - Other Provisions (43.3) PBT , Provision for Tax (5.2) PAT Effective Tax Rate (%) (503)bp 33.0 (42)bp (105)bp Exhibit 2: 1QFY2013 Actual vs Angel estimates Particulars (` cr) Actual Estimates Var. (%) Net interest income Non-interest income Operating income Operating expenses (2.2) Pre-prov. profit Provisions & cont (24.3) PBT Prov. for taxes PAT August 10,

3 Exhibit 3: 1QFY2013 performance Particulars (` cr) 1QFY13 4QFY12 % chg (qoq) 1QFY12 % chg (yoy) Balance sheet Advances (` cr) 33,225 33, , Deposits (` cr) 53,117 53,347 (0.4) 43, Credit-to-Deposit Ratio (%) bp bp Current deposits (` cr) 4,480 5,734 (21.9) 4, Saving deposits (` cr) 16,081 15, , CASA deposits (` cr) 20,560 21,715 (5.3) 17, CASA ratio (%) (200)bp 40.4 (169)bp CAR (%) bp 14.4 (62)bp Tier 1 CAR (%) bp 11.8 (33)bp Profitability Ratios (%) Cost of deposits bp bp Yield on advances bp bp Yield on investments bp bp Reported NIM (6)bp 3.8 (2)bp Cost-to-income ratio (59)bp 37.3 (326)bp Asset quality Gross NPAs (` cr) Gross NPAs (%) bp 2.0 (37)bp Net NPAs (` cr) (2.4) 58 (17.5) Net NPAs (%) (1)bp (8)bp Provision Coverage Ratio (%) bp bp Slippage ratio (%) (135)bp 1.3 (28)bp NPA to avg. assets (%) 0.3 (8)bp (3)bp Muted qoq growth in loan book Business growth for the bank remained muted during 1QFY2013, with advances growing by 0.4% qoq and deposits declining by 0.4% qoq. During 1QFY2013, the CD ratio of the bank improved by 55bp qoq to 62.6% (still lowest amongst peers). On a y-o-y basis, the growth was healthy with advances and deposits growing by 25.8% and 23.3% yoy. On the liabilities side, the performance on the CASA front was moderate with current bank accounts up by 6.7% yoy and savings bank accounts growing by a healthy 21.8% yoy. However, due to high growth in term deposits, the CASA ratio declined to 38.7%. The bank s outstanding loan book concentration within the J&K state is ~40%, while that outside the state is ~60% (37% in J&K as of FY2012 end and 40% in J&K as of 1QFY2012). For FY2013, the management aims at growing its advances within J&K state at ~25-30%, while going slower on its advances growth in the rest of India (less than 20%). August 10,

4 Exhibit 4: Expanding CDR Exhibit 5: CASA dips 200bp in 1QFY2013 Adv. yoy chg (%) Dep. yoy chg (%) CDR (%, RHS) CASA ratio (%) CASA growth (% yoy, RHS)) NIMs decline by 6bp qoq The cost of deposits for the bank was higher by 52bp sequentially at 6.9% on account of lower CASA ratio (decline of 200bp qoq). However, higher incremental lending in the state of J&K led to yield on advances increasing by 22bp to 7.7%. Consequently the decline in reported NIMs was limited at 6bp qoq to 3.8%. With the management looking at increasing the proportion of loans within the state of J&K to above 40% (NIMs higher at ~6% in J&K state compared to ~2.0% outside the state), we expect improved performance on the margin front by the bank during FY2013. Exhibit 6: Cost of deposits higher by 52bp qoq Exhibit 7: NIMs down by 6bp qoq (%) (%) Strong performance on the fee income front The bank s fee income grew by a strong 28.7% yoy to `73cr on account of healthy performance on both CEB (up 22.9% yoy) and recoveries front (up 44.6% yoy). The treasury segment also performed impressively with income from treasuries doubling on a y-o-y basis. The bank has 22cr shares (investment value at `10 a share) of Metlife India of which it would be selling 5.2cr shares to the latter at a price of `36.50 and 6.64cr shares to Punjab National Bank (price yet to be decided) post the IRDA approval. August 10,

5 Slippages under control The bank s asset quality remained stable sequentially, with a marginal increase of 6bp in gross NPA ratio to 1.6% and 1bp decline in the net NPA ratio to 0.14%. The slippage levels were under control at `86cr (annualised slippage ratio of 1.0%). The bank s PCR which is the highest in the industry, improved on a sequential basis by 33bp to 94.1%. The bank brought accounts having worth between `10-50lakh under the system driven NPA recognition during the quarter. The bank plans to bring the rest of the accounts (accounts worth `8,293cr of which `4,752cr are personal loans towards state government employees) under system driven NPA recognition by 2QFY2013 end. The bank restructured `40cr worth of accounts during 1QFY2013, however it also witnessed `39cr of repayments which led to the outstanding restructured book remaining flat qoq at `1,367cr (4.1% of the total loan book). The management expects no major restructuring as of now, however it remained cautious of negative surprises on the asset quality which could result from further deterioration in the economy. Exhibit 8: Best-in-class asset quality Gross NPAs (%) Net NPAs (%) PCR (%, RHS) Exhibit 9: Credit costs under control NPA Provisions to Avg Assets (%) Investment arguments Robust asset quality till now Over the years, the bank has maintained its robust asset quality profile, with the best-in-industry provision coverage ratio (94.1% as of 1QFY2013). During 1QFY2013, slippages were under control (slippage ratio of 1.0% in 1QFY2013 from 2.4% in 4QFY2012), while recoveries, upgrades and write-offs were healthy too. Going ahead, we have factored in slippage levels of 1.5% and 1.8% for FY2013 and FY2014 respectively. Strong branch network and legacy Dominant market share The bank with ~500 branches as of FY2012 has the highest number of branches in J&K (much higher than the combined total of 300 branches of State Bank of India and Punjab & Sind Bank in the state). Due to its strong branch network and legacy of banking relationships, the bank has a dominant 70% market share in deposits in J&K. The CASA deposits constituted strong 46.7% of incremental August 10,

6 deposits growth from FY This strong base of low-cost deposits is expected to sustain relatively higher NIM of % vs other mid-sized banks. Outlook and valuation At the current market price, the stock is trading at 0.8x FY2014E ABV vis-à-vis its historic range of x and eight-year median of 1.0x. Immediate levers in the form of increased CD ratio from the current low of 62.6% to higher yielding advances are likely to provide near-term higher momentum to NII growth for the bank relative to other mid-sized banks. The bank also has a higher CASA ratio, capital adequacy and provision coverage than most mid-sized banks. However, with the stock trading at the upper end (0.8x) of the FY2014 P/ABV range for PSU banks ( x), an upside in the stock price from the current levels appears limited. Hence we recommend an Accumulate rating on the stock with a target price of `1,026. Exhibit 10: Key assumptions Particulars (%) Earlier estimates Revised estimates FY2013 FY2014 FY2013 FY2014 Credit growth Deposit growth CASA ratio NIMs Other income growth Growth in staff expenses Growth in other expenses Slippages Coverage ratio Source: Angel Research Exhibit 11: Change in estimates Particulars (` cr) Earlier estimates FY2013 Revised estimates Var. (%) Earlier estimates FY2014 Revised estimates Var. (%) NII 2,180 2, ,480 2, Non-interest income Operating income 2,525 2, ,858 2, Operating expenses ,079 1,079 - Pre-prov. profit 1,595 1, ,779 1, Provisions & cont (10.1) PBT 1,262 1, ,314 1, Prov. for taxes PAT Source: Angel Research August 10,

7 Exhibit 12: P/ABV band (standalone) 1,800 Price (`) 0.3x 0.6x 0.9x 1.2x 1.5x 1,500 1, Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Source: Company, Bloomberg, Angel Research Exhibit 13: Recommendation summary Company Reco. CMP (`) Tgt. price (`) Upside (%) FY2014E P/ABV (x) FY2014E Tgt P/ABV (x) FY2014E P/E (x) FY E EPS CAGR (%) FY2014E RoA (%) FY2014E RoE (%) AxisBk Buy 1,071 1, FedBk Accumulate HDFCBk Neutral ICICIBk* Buy 955 1, SIB Buy YesBk Buy AllBk Accumulate AndhBk Neutral BOB Buy BOI Buy BOM Neutral CanBk Buy CentBk Neutral CorpBk Buy DenaBk Buy IDBI# Buy IndBk Accumulate IOB Accumulate J&KBk Accumulate 924 1, OBC Buy PNB Buy SBI* Buy 1,888 2, SynBk Buy UcoBk Neutral UnionBk Buy UtdBk Buy VijBk Neutral ; Note:*Target multiples=sotp Target Price/ABV (including subsidiaries), # Without adjusting for SASF August 10,

8 Company Background Jammu and Kashmir Bank is a mid-sized public sector bank, with a branch network of over 600 branches and operations mostly concentrated in the parent state of J&K (~80% branches). The bank has the highest number of branches (~ 500) in J&K (while State Bank of India, having ~160 branches, comes a distant second), allowing the bank to maintain a favorable deposit mix along with healthy margins. Income statement (standalone) Y/E March (` cr) FY08 FY09 FY10 FY11 FY12 FY13E FY14E Net Interest Income 810 1,000 1,119 1,544 1,838 2,241 2,520 - YoY Growth (%) Other Income YoY Growth (%) 44.1 (0.7) 59.2 (12.4) (8.4) Operating Income 1,074 1,262 1,536 1,908 2,172 2,625 2,921 - YoY Growth (%) Operating Expenses ,079 - YoY Growth (%) Pre - Provision Profit ,149 1,370 1,694 1,841 - YoY Growth (%) Prov. & Cont YoY Growth (%) (42.2) (21.3) Profit Before Tax ,201 1,395 1,377 - YoY Growth (%) (1.3) Prov. for Taxation as a % of PBT PAT YoY Growth (%) (1.3) Balance sheet (standalone) Y/E March (` cr) FY08 FY09 FY10 FY11 FY12 FY13E FY14E Share Capital Reserves & Surplus 2,260 2,574 2,962 3,430 4,045 4,765 5,478 Deposits 28,593 33,004 37,237 44,676 53,347 60,282 68,721 - Growth (%) Borrowings Tier 2 Capital Other Liab. & Prov. 1,102 1,070 1,199 1,249 1,588 1,721 1,923 Total Liabilities 32,756 37,693 42,547 50,508 60,269 68,220 77,771 Cash Balances 3,220 2,303 2,745 2,975 2,784 2,411 2,749 Bank Balances 1,217 2,972 1, ,670 1,891 2,155 Investments 8,758 10,736 13,956 19,696 21,624 22,317 22,229 Advances 18,883 20,930 23,057 26,194 33,077 40,354 49,232 - Growth (%) Fixed Assets Other Assets Total Assets 32,756 37,693 42,547 50,508 60,269 68,220 77,771 - Growth (%) August 10,

9 Ratio analysis (standalone) Y/E March FY08 FY09 FY10 FY11 FY12 FY13E FY14E Profitability ratios (%) NIMs Cost to Income Ratio RoA RoE B/S ratios (%) CASA Ratio Credit/Deposit Ratio CAR Tier I Asset quality (%) Gross NPAs Net NPAs Slippages NPA Prov./Avg. Assets Provision Coverage Per Share Data (`) EPS ABVPS DPS Valuation Ratios PER (x) P/ABVPS (x) Dividend Yield DuPont Analysis (%) NII (-) Prov. Exp Adj. NII Treasury Int. Sens. Inc Other Inc Op. Inc Opex PBT Taxes RoA Leverage (x) RoE August 10,

10 Research Team Tel: Website: DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement Jammu & Kashmir Bank 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%) August 10,