Buy Jammu and Kashmir Bank; target of Rs 52: ICICI Direct

ICICI Direct's research report on Jammu and Kashmir Bank

J&K Bank reported asset quality deterioration due to IL&FS exposure being classified as substandard leading to increase in absolute GNPA to ~Rs 6860 crore, up 13% QoQ. Accordingly, GNPA ratio increased 94 bps QoQ to 9.94% Advances growth came in lower QoQ at 12.3% YoY at ~Rs 65027 crore, primarily led by moderation in disbursement outside J&K state. Advances growth in J&K continued to remain healthy at ~22% YoY Margins increased to 3.91% vs. 3.69% in Q2FY19 with strong NII growth of 13% YoY ahead of our estimates. Growth in other income came in healthy at 52% YoY to ~Rs 164 crore on the back of trading income, which supported topline. Therefore, PPP came in at Rs 425 crore, up 11% YoY and above our estimate of Rs 354 crore IL&FS exposure and ageing of stressed assets kept provision elevated at ~Rs 253 crore. However, margin expansion and healthy growth in other income led to PAT growth at 43% YoY to Rs 104 crore, above our estimate of Rs 97 crore On back of healthy operational performance, the management expects RoA target of 1.3% and RoE target of 16% for FY20E.

Outlook

Post a slowdown in J&K state & higher corporate slippage, a revival in credit growth is seen in J&K. However, lower slippage from rehabilitated accounts till now are positive. NPA from IL&FS and factoring in some rehabilitation losses from J&K, ABV is revised lower. Accordingly, we reduce the target price to Rs 52 (earlier Rs 58), maintaining valuations at ~1x FY20E ABV. We maintain our BUY recommendation on the stock.