Moneycontrol BureauWhile it is too early to assess the impact of the recent floods in Jammu & Kashmir on the financials of the state’s leading bank, J&K Bank, there may be some effect on its agricultural loan book, which is a small portion of its total credit portfolio.Analysts at Motilal Oswal met with J&K Bank’s chairman and CEO Mushtaq Ahmad to discuss the impact of the floods on the bank as well as to understand its outlook on business growth, profitability and asset quality.“While it is perceived that the floods have affected the entire state, in reality, few commercial hubs have been impacted,” analysts wrote. “There has been damage to agriculture and horticulture crops, which might lead to slippages in 2HFY15. J&K Bank’s exposure to agriculture in the state constitutes about 8 percent of the overall loan book,” they added.However, about 75 percent of credit disbursed is in the flood-affected areas in J&K state with Srinagar and Jammu districts having the lion’s share of about 50%, analysts at Prabhudas Lilladher wrote.“Srinagar has mostly tourism related businesses and has exposure of short term in nature, which could have a knock-on effect on asset quality immediately,” they added. “Although it is early to assess the impact on asset quality, Srinagar has 4.6 percent GNPAs (Exhibit 2), while J&K Bank -- being the largest share in the state -- has lowest GNPAs of 2.3 percent among the three large banks as at Q1FY15. However, the bank management believes that given that the flooding was a national disaster, the Reserve Bank of India would provide some regulatory relief to it in terms of NPA recognition and restructuring, the PL report said. Business outlookA big (Rs 700-crore) agriculture account is likely to come out of J&K Bank’s NPA list in the third quarter after completing restructuring while a Rs 270-crore real estate account will also likely be upgraded, according to Motilal Oswal.Even as other banks have opened 70 branches in the state, J&K Bank, with its 175 branches, continues to dominate with about 67 percent market share. This monopoly should help it enjoy superior net interest margins (6 percent plus) even though recent disruptions would dent profitability.“Despite stress on asset quality in the last quarter, key parameters like NIM (3.6 percent), common equity tier I ratio (11.5 percent+), CD ratio (70 percent) and NSL (5.3 percent) levels remain one of the best among old generation private banks,” the report said. According to Motilal Oswal, while near-term profitability is likely to remain under pressure, valuations are reasonable at 1x FY16 earnings and 0.9x FY17 book value, and largely factor in the negatives. “We maintain a Buy, with a target price of INR183,” it said.Prabhudas Lilladher also has a Buy rating on the stock with a target price of Rs 189.
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