Jammu & Kashmir Bank – Buy

Jammu & Kashmir Bank came out with a robust set of Sept 2012 quarter numbers, in continuation with its past trend. This resulted in the stock touching new highs, and it is currently trading at Rs 1234 per share. We, at Dalal Street Investment Journal, have been bullish over the counter in the past and continue to hold to our conviction in the scrip.The key financial parameters of the bank are as follows:

For the Sept quarter, the bank’s Net Interest Income (NII) increased by 27.26% to Rs 553 crore while the Net Profit grew at a handsome rate of 35% to Rs 270 crore on a YoY basis. Even on a half yearly basis, its NII and Net Profit grew at 25% and 35% respectively.

Further, its Cost-to-Income ratio stood at 34.32% against 38.13% in the similar period last year. This indicates that the bank is operating in an efficient manner and is controlling its unwanted expenditure.

The gross NPAs contracted by 30 bps to 1.59% on a YoY basis, while it saw a marginal contraction of 1 bps on a sequential basis. However, the bank faced marginal headwinds when it came to the Net NPAs, as it increased by 2 bps to 0.16% on a sequential basis. The bank continued its higher coverage ratio. Its PCR stands at 93.3%, higher by 130 bps on a YoY basis, which is one of the best in the industry. It has been maintaining good asset quality in the past, and with a high coverage ratio, we don’t see any major issues for the bank with respect to its asset quality going ahead.

The Net Interest Margin (NIM) of the bank improved by 10 bps to 3.94% on a sequential basis, which is commendable. On a YoY basis, the NIM improved by 18 bps after the cost on deposits increased by 52 bps to 7% and the yield on advances grew by 61 bps to 12.71%.

As on Sept 30, 2012, the Capital Adequacy Ratio (CAR) of the bank stands at 13.73%. Its Tier 1 CAR stood at 11.59%, which is at a very good level. We believe that even though banks still have a fair amount of time before the Basel III compliance is effected, J&K Bank would not face any issues as the majority of its capital is classified under Tier 1.

The deposits of the bank have grown at a decent rate of 15.82% to Rs 54926 crore while the advances have also grown strongly at 21.38% to Rs 34272 crore. The CASA ratio of the bank remained almost stable at 38.16%.

All its segments performed extremely well during the quarter, but among them the best was the Treasury operations. The revenue from the Treasury grew by 29% to Rs 469 crore and profit jumped 136% to Rs 13 crore. The profit from retail and wholesale banking also grew at 35% and 56% respectively.

Commenting on the results, J&K Bank’s Chairman and CEO Mushtaq Ahmad said, “The results are encouraging and we hope to achieve our target figures for the FY2012-13 (net profit target of Rs 1000 crore and a business target of Rs 100000 crore) well in time. Our key ratios have improved further”.

On the valuations front, the bank is currently available at a trailing Price to Earnings multiple of 6.4x and a Price to Book Value of 1.31x, which should be considered a fair valuation. We continue to hold our bullish stance on the counter. One could invest in the scrip with a long-term horizon to garner better returns.