J&K Bank retail growth and NIM recovery underpin earnings outlook despite Q1 pressure

Investment View and Valuation

Anand Rathi Research's July 29, 2026 result update on J&K Bank maintains a BUY rating and a 12-month target price of Rs 218. The broker considers the Q1 FY27 result mixed: the reported net interest margin (NIM) miss led to a sharp negative stock reaction, but Anand Rathi believes underlying core NIM was broadly stable sequentially after adjusting for a one-off item in Q4 FY26.

The target price is based on valuing J&K Bank at 1.1 times FY28E price-to-book value. The broker expects return on assets to remain above 1.2 per cent and return on equity to be about 14 per cent over its outlook.

Growth Outlook and Deposit Trends

J&K Bank reported robust advances growth of about 26.6 per cent year-on-year in Q1 FY27, compared with 17.7 per cent in Q4 FY26. Growth was led by opportunity-driven corporate lending. Management expects the next phase of growth to be driven primarily by retail loans, with retail growth in Jammu and Kashmir beginning to improve.

Management has guided for credit growth of 18-20 per cent in FY27. Anand Rathi expects J&K Bank's credit growth to be in line with the banking system over its forecast period. Deposits grew 16.7 per cent year-on-year in Q1 FY27, while the CASA ratio declined to 39 per cent from 43 per cent in Q4 FY26.

NIM Pressure and Recovery Potential

Reported Q1 FY27 NIM fell 24 basis points quarter-on-quarter to 3.28 per cent. The decline reflected a 28-basis-point increase in cost of funds and a 25-basis-point improvement in the loan-to-deposit ratio, partly offset by a 6-basis-point improvement in yields.

Anand Rathi notes that, excluding a Rs 1.05 billion one-off interest expense in Q4 FY26 relating to subvention on a government scheme, NIM would have been largely flat sequentially. Management expects NIM to recover to about 3.5 per cent, supported by better yields from a higher retail mix and the run-off of low-yield corporate loans, alongside lower funding costs as high-cost deposits mature.

Q1 FY27 Financial Performance

Non-interest income was below Anand Rathi's expectations because recoveries from written-off accounts were lower and treasury income was muted. The broker expects these two income streams to recover and has built more than Rs 4 billion from them into FY27E estimates.

Management has guided for return on equity of 16 per cent in FY27E, supported by NIM recovery, better operating efficiency and negligible credit cost in the coming quarters.

Asset Quality Improvement

Asset quality improved further in Q1 FY27. Gross slippages declined to 42 basis points, from 71 basis points in Q4 FY26 and 105 basis points in Q1 FY26. Net slippages moderated to 6 basis points, from 19 basis points and 30 basis points, respectively.

Management expects the expected credit loss impact to remain below the previously guided Rs 16-17 billion.

Earnings Estimates

The broker raised its FY27E and FY28E profit after tax estimates by 1.3 per cent and 8.1 per cent, respectively.

Key Risks

• Higher credit costs from increased slippages and lower recoveries.
• Slower credit growth.