IGI Logo

J&K Bank, under the incumbent management (MD Baldev Prakash since December 2021), has staged decent recovery (RoA/RoE at 0.9%/14% in FY23) from a prolonged weak performance over FY15-FY22, including high NPAs and even losses due to RBI’s AQR, floods, political disruption and the pandemic. Post abrogation of Article 370, growth as well as NPA recovery prospects in J&K State have improved meaningfully, reflected in tourists’ influx and on-ground economic activity, while the bank’s inherent cost advantage due to higher CASA ratio (>50%) should help sustain its relatively high margins (>3.75%) and, thus, drive up RoAs well above 1%. The bank believes political interference has come down materially, while the RBI as well as Central govt should continue to have a say in the mgmt. to ensure a smooth conduct of the bank, even if part statehood is restored. With CET 1 at 11.4% (incl. Q1 PAT + ESPS), the bank plans to raise capital to the tune of Rs7.5bn at an appropriate time, thereby further boosting CET 1 by 90bps. Post the recent run-up, the stock trades at 1.4x its 1QFY24 ABV, while further re-rating will track the bank’s delivery on growth coupled with better return ratios on guided lines and sustained mgmt. stability.

Political, asset-quality risk abated meaningfully, while management stability adds to comfort: Post abrogation of Article 370 on February 3, 2021, J&K State (now UT) is under the governor’s rule, leading to meaningful reduction in terrorism, political noise (incl. stone pelting) and steady socio-economic development including record influx of tourism. J&K Bank also underwent management change with the appointment of the current MD, Baldev Prakash (from SBI) in Dec-21. Since then, the top management has staged a gradual turnaround in the bank from its tumultuous past, including high NPAs due to RBIs AQR/floods/Pandemic, forcing the bank to abandon growth/unwind its credit portfolio. The bank believes political interference has come down materially, while RBI as well as the central government should continue to have enough say in the management to ensure a smooth conduct of the bank, even if statehood is restored. So, effectively, the bank may have dual control, including that of the central government, ensuring management/strategic business stability

Growth set to accelerate, maintaining a balance between J&K/RoI with an unwavering focus on profitability and quality: Given multiple dislocations, including asset quality and political/management, the bank reported just 7% CAGR credit growth over FY15- 21 (even declining in FY15/FY17/FY20), but it recovered gradually and registered healthy 17% growth in Q1FY24. Going forward, the bank expects growth to remain healthy on account of a thriving J&K economy and re-invigoration of growth in Rest of India (RoI). That said, the bank has taken multiple measures to strengthen its underwriting and credit monitoring practice, while it has upgraded its tech infrastructure to drive new-age retail lending. Within J&K – apart from tourism, industries/sectors such as power, infra, mining, education, hotel, and so on are thriving, leading to a huge growth opportunity for the bank. Competition on the lending side in J&K State still remains minimal and, thus, provides a perfect platform for the bank to ramp up growth. In RoI, the bank remains open to growth, but primarily into AAA corporates, which should help the bank improve overall LDR and, thus, support margins

Strong margins, lower provisions to drive up RoAs >1%: The bank traditionally has benefitted from high CASA (>50%) leading to one of the lowest CoD/CoF @3.7%/3.8% in FY23 among peers, which along with accelerating growth led to healthy NIMs at 3.9-4.0%. Similar to other banks, some margin moderation may happen due to rising CoF, but the bank expects NIMs to sustain at >3.75% from a long-term perspective. The bank also expects its GNPA/NNPA ratio to reduce from 5.8%/1.4% to 4.5%/1% by FY24-end and then to <3%/1% mainly led by better recoveries (benefiting from SARFASEI, lower political interference, OTS and lumpy corporate resolutions), while healthy PCR @76% should help contain credit cost (even factoring in some build-up for ECL) going ahead and, thus, boost RoAs well above 1%. 

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf &

SEBI Registration number is INH000000354