Dec 19, 2016 01:13 PM IST IST | Source: Moneycontrol.com

CLSA upgrades J&K Bank post Q2 nos but cuts earnings estimates

CLSA has upgraded Jammu & Kashmir Bank rating from sell to buy with a revised target of Rs 77 (against Rs 65 earlier) as it believes valuation is reasonable and bank's focus on sanitising its book (asset quality) is also encouraging. However, the brokerage house cut its earnings estimates for FY17-19 after September quarter earnings.

Moneycontrol Bureau

CLSA has upgraded Jammu & Kashmir Bank rating from sell to buy with a revised target of Rs 77 (against Rs 65 earlier) as it believes valuation is reasonable and bank's focus on sanitising its book (asset quality) is also encouraging. However, the brokerage house cut its earnings estimates for FY17-19 after September quarter earnings.

According to the research firm, bank's return on equity may stay low due to higher non-performing loans (NPL) and its focus on improving its coverage ratio.

During Q2FY17, J&K Bank reported a loss of Rs 602.4 crore as slippage remained high (9 percent of annualised loans) & annualised credit cost rose to 8 percent raising NPL coverage 700 basis points to 43 percent.

Slippage was led by its corporate book (mostly outside J&K state) leading to a 21 percent QoQ rise in gross NPLs to 11 percent of loans. Overall stressed loans are at 22 percent and its net NPL to net worth ratio is at 55 percent.

In the J&K state as well, the bank is seeing some stress due to a slowdown/instability leading to 10 percent of loans being identified as stressed (half were restructured under special dispensation by the RBI till December 2017, the rest in 2HFY17).

Encouragingly, management highlighted the situation in the state has improved and this should also help to bring down the stress in portfolio. It also indicated plans to complete recognition by March 2017.

CLSA says recovery of the J&K state will be key. J&K state dominates the bank’s operations and forms 90 percent of CASA, 80 percent of deposits & 50 percent of loans.

The slowdown in the state has led to more moderate loan growth, from 15 percent YoY last year to 5 percent now (loan growth is at 7 percent). This, along with leakage of income on NPLs, dragged NII down by 8 percent YoY.

J&K Bank indicated growth should pick up next year to 15-20 percent, although it remains conservative.

CASA franchise remained strong & formed 45 percent of deposits (up 17 percent YoY) in Q2. Ddemonetisation could further boost deposits, the brokerage house feels.

At 12:30 hours IST, the stock was quoting at Rs 64.10, up Rs 0.55, or 0.87 percent on the BSE.

Posted by Sunil Shankar Matkar

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