Stock Review: JAMMU & Kashmir Bank

 

 

Good loan book growth & asset quality can help Jammu & Kashmir Bank grow at a high rate in future. Investors can consider the stock for long term

 

JAMMU & Kashmir Bank is a medium-size bank in the country with a market capitalisation of around 3,700 crore. The uniqueness of its business is that it is the only bank that caters to the need of the government of Jammu & Kashmir (J&K). The bank operates primarily in the northern part of India. However, it has been expanding in the other parts of the country as well.

BUSINESS & FINANCIALS

The bank had a network of around 536 branches at the end of FY10. This is much lower compared to some of its peers in both the public and private space. A wider branch network helps in increasing reach to the retail client base, which in turn improves low-cost current and savings accounts (CASA).

   For J&K Bank, CASA balances stood at 38% of total deposits at the end of the June 2010 quarter. Average CASA for Indian banks hovers around 30%. J&K Bank's above average CASA is commendable given the fact that it does not have a wide branch network. With all of the state government's funds being routed through this bank, it becomes easier for the bank to create and maintain low cost accounts such as those related to various state payments such as tax, electricity etc. A high CASA ratio also helps the bank to maintain high net interest margins (NIM), which is the interest rate differential between the bank's lending and borrowing. The bank reported a NIM of 3.7% at the end of the June 2010 quarter. This is the highest the bank has achieved in the last eight quarters. In fact, the bank has reported NIMs in excess of 3% in the last five quarters. The bank's performance in this area is laudable. While most banks strive to achieve net non-performing assets below 1%, J & K Bank has managed to keep it below the benchmark for the past five quarters. Moreover, at the end of the latest quarter, the bank reported nil net NPAs. Lower bad loans indicate that the bank has strong and effective credit appraisal processes used for loan disbursements. This will also boost the bank's bottom-line which has grown by an average 27% in the last four quarters year-on-year (y-o-y). This is because lower bad loans would lead to lower provisioning for bad loans, thereby enabling the bank to invest that amount in a more effective use. Though the bank is top in league in terms of asset quality and margins, it has not been able to grow its loan book as fast. The bank grew its loan book by 12% as against the industry's average credit growth of around 20% in the June 2010 quarter on y-o-y basis. In fact, the bank has grown its loan book at an average 5% per quarter compared with the year-ago periods in the last four quarters. This is considerably lower than industry standards.

VALUATION

The bank's stock is trading at a price-to-book value of 1.2. This is still lower compared with earlier highs of 1.6. This shows that the bank is relatively cheap. Moreover, the bank's stock has outperformed the Sensex in the past six months. It has earned a return of 25% against the benchmark's 16%. The stock also has a decent dividend yield of 2.9%. A high loan book growth coupled with the current asset quality can help the bank in growing at a high rate in the coming quarters. Investors can consider this stock for long term.