Buy J&K Bank; target of Rs 987: Angel Broking

“Jammu and Kashmir Bank (J&K Bank) registered healthy net profit growth of 19.9% yoy to Rs 168 crore, above our estimate of Rs 121 crore for 3QFY2011, primarily on account of lower-thanestimated provisioning expenses. We were conservatively penciling in higher NPA provisions to create a margin of safety considering the political disturbances in the state of J&K during 9MFY2011.”

“Advances showed strong traction with growth of 9.4% qoq and 22% yoy compared to growth of 0.6% qoq and 9.8% yoy in 2QFY2011. The CD ratio improved to 62.1% from 58.4% as of 2QFY2011. Deposits registered healthy growth of 21.4% yoy. Saving account deposits grew by a strong 29.6% yoy. However, due to reduction in current account deposits overall CASA growth was slower at 16.8% yoy. CASA ratio remained stable ~40% levels. Improvement in CD ratio coupled with higher yield on investments and decline in cost of deposits aided NIM expansion to 3.70% compared to 3.66% in 2QFY2011 and 3.28% in 3QFY2010. Asset quality of the bank improved further with decline in both gross and net NPAs. Gross NPA ratio improved to 1.95% compared to 2.17% in 2QFY2011 and the net NPA ratio improved to 0.04% from 0.13% in 2QFY2011.”

“The stock is trading at 0.9x FY2012E ABV vis-ŕ-vis its historic range of 0.8-1.4x and median of 1.1x. We maintain our positive view on the stock considering the bank's strong deposit mix, dominant regional market share and healthy track record in asset quality. We believe that this provides sufficient margin of safety from the risks of political disturbances in J&K, especially in light of the bank's steady performance even during past crises. Even taking into account the inherently lower-than-national average growth (in GDP, deposits, credit) in J&K, at just 0.9x FY2012E P/ABV and with sustainable RoEs of at least 17%, the stock is inexpensive. Hence, we maintain a Buy on the stock, with a target price of Rs 987, implying an upside of 33% from current levels,” says Angel Broking research report.

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