Recommendations From Banking Sector

This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

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A GOOD STOCK TO INVEST 

HERE IS WHY
Asset quality better than other banks
Expected growth in CASA post normalcy in J&K
Expected traction in agri-credit segment

Jammu and Kashmir Bank Limited (JKB), incorporated in 1938, was the first state-owned bank in the country. Today, JKB functions as a universal bank in Jammu & Kashmir and as a specialised bank in rest of the country. The bank’s segments include treasury operations, corporate banking, retail banking and other banking business. It has more than 850 branches spread over 20 states and a Union territory. 

JKB follows a two-legged business model, whereby it seeks to increase lending in its home state which results in higher margins despite modest volumes and, at the same time, seeks to capture niche lending opportunities on a pan-India basis to build volumes and improve margins. 

JKB has a dominant position in J&K with about 65 per cent market share in terms of advances and deposits. For the bank, more than 50 per cent of advances and about 80 per cent of the deposits are being sourced from the state. In FY17, its advances mix comprised of corporates (53per cent), personal (19 per cent), agriculture (9 per cent), SMEs and others (9 per cent) and trade (10 per cent). Its FY17 gross non-performing assets (GNPAs) and net non-performing assets (NNPAs) stood at 11.2 per cent and 4.8 per cent, respectively, while Tier-I CAR stood at 10.28 per cent. Also, since 50 per cent of total large corporate assets are AAA rated, there is low asset quality risk involved. The bank has been able to garner higher net interest margin (NIM) of 6 per cent in J&K and sub 3.5 per cent outside J&K .

We expect J&K Bank to recover from the lows caused by dent to economic activity in the state and tap the robust potential credit growth in J&K state and the rest of India. The management is focusing on increasing agriculture and low ticket retail segments. With low penetration-- out of 3 lakh apple growers in the state, hardly 10,000-20,000 use bank credit facilities--we expect traction in agricredit segment. 

On the financial front, J&K Bank posted 0.47 per cent increase in its revenue to Rs1,680.32 crore in Q1FY18 from Rs1,672.35 crore in Q1FY17. The bank’s PBDT increased 5.49 per cent to Rs44.84 crore in the first quarter of FY18 on a yearly basis. The bank’s net profit rose 31.94 per cent to Rs30.19 crore for the corresponding period. 

On an annual basis, the bank’s revenue declined 2.3 per cent to Rs6,685.80 crore in FY17 compared to the previous fiscal. The bank’s PBDT declined 22.39 per cent to Rs1,294.34 crore in FY17 from Rs1,667.92 crore in FY16. The bank’s net profit also declined from Rs416.04 crore in FY16 to Rs-1,632.29 crore in FY17. On the valuation front, the share price of JKB is trading at 0.80 times its book value. The company’s ROE and ROCE stood at -28.47 per cent and 27.72 per cent, respectively.

Considering the fact that JKB’s asset quality is better than most other banks and the expected growth in current account and savings account (CSASA) deposits post normalcy in Jammu & Kashmir, we expect JKB’s performance to come back on track. We recommend our reader-investors to BUY the stock.