Company Overview:

Jammu and Kashmir Bank (J&K Bank) is a Scheduled Commercial Bank and one of the oldest private sector Bank in India, incorporated in 1938. Bank is listed on the NSE and the BSE and has its Corporate Headquarters at Srinagar. Bank functions as a leading bank in the Union Territories of Jammu & Kashmir and Ladakh and is designated by Reserve Bank of India as its exclusive agent for carrying out banking business for the Government of Jammu & Kashmir and Ladakh. J&K bank caters to banking requirements of various customer segments which includes Business enterprises, employees of government, semi-government and autonomous bodies, farmers, artisans, public sector organizations and corporate clients. The bank also offers a wide range of retail credit products, including home, personal loans, education loan, agriculture, trade credit and consumer lending, a number of unique financial products tailored to the needs of various customer segments.

Sector Overview

In India the Retail Banking scenario has modified the market from a sellers’ market to a buyers’ market, which is also known as consumer banking, comprises the services that a bank offers to the general public. It has been the focus of the banking industry across the world. It refers to the dealing of commercial banks with individual customers, both on liabilities and assets sides of the balance sheet. The innovation of new banking products, which cater to the banking needs of individual customers, is the force behind the constant growth of retail banking. Retail banking in any economy is characterized by multiple products, multiple channels and multiple customer groups. It has immense opportunities in a growing economy like India.

Business updates shows healthy loan/deposit growth: Banks are witnessing healthy loan growth, led by strong retail and MSME credit, as reflected in business updates reported by most of the banks. System loan growth has been relatively stable currently, at 15-16% y-o-y. Retail segment remains resilient with a clear demand trend visible in vehicle, microfinance, mortgage, and unsecured segments. SMEs is also seeing healthy traction. Corporate loan growth has been sluggish, but as capex picks up gradually, corporate credit growth is expected to pick up with a lag. Among our coverage banks, we expect banks to report 3-5% q-o-q growth in loans. Outlook on incremental loan growth would be an important monitorable. Deposit growth is gaining traction however, but it is mainly driven by time deposits rather than CASA deposits.Asset quality strong: Asset quality is expected to remain stable with modest slippages along with stable recoveries and upgrades. We expect core credit costs to remain flat/ lower sequentially for most banks as the portfolio appears to be holding up well across product lines. Additionally, for most banks, the restructured book has seen significant run down and is expected to see fewer slippages from hereon. Moreover, lower SMA book would lend support. NIMs expected to be lower by 10-20 bps: Re-pricing of deposit rates upwards is putting pressure on NIMs as most of the repricing on the asset side has already happened. NIM compression of 10-20 bps q-o-q is expected for the coverage. PSU banks have a higher share of MCLR-linked loans in their book and, thus, PSBs could see lower margin compression as they could manage to reprice the MCLR book marginally higher because earlier pass-through was slower but now the competitive intensity is higher in corporate loans which are linked to MCLR, which could partially restrict pass through.

TECHNICAL VIEW:

Technically J&K Bank has given strong Price volume based momentum from levels of 70-80 Levels in the month of July and August, Later after strong consolidation in range, Stock has given Cup pattern break-out above level of 78 with price volume breakout on 17th August and Stock moved sharply and hit high of 94 Levels. We see stock is again consolidating in range of 92-104 levels before bigger trend moment, so we suggest to Buy this PSU which can give strong return on investment given price target of 148 Levels with strong support near levels of 92-84.

Asset quality improves:

Headline GNPA/NNPA declined sequentially on modest slippages and higher recoveries. Slippages were Rs2.3bn (1.1% of loans), lower than the previous quarters and better than our expectations. With most of the stress pool already recognized and the economic environment in the UT of J&K and Ladakh improving, the slippage rate is expected to be under ~1.5% in the medium term.

Loan growth to be strong:

With strong economic activities in the bank’s home region and high liquidity on its book, credit growth is expected to be strong. We have factored in ~17-18% credit growth for FY24-26.

Better margins lower credit cost to keep profitability strong:

Given the bank’s dominance in its home state where it has the ability to charge higher interest rates and, given its strong liability franchise and expected lower slippages, we expect margins to be steady at present levels. We expect credit costs to be favourable for the medium term. Strong margins, improving operating leverage and lower provisions would keep profitability strong. We model 0.9%-1% RoA through FY24-26.

Conference-call takeaways:

• NIM: Maintains 3.75%-3.9%, The key levers to maintain CASA are a favorable C/D ratio, increase in yields on its investment book and lower CASA.
• Credit Cost: Expects credit cost of ~10bps till Mar’25, Credit cost to normalize to 50-60bps post Mar’25, Currently holds a Rs6.9bn contingent provision and Rs1.34bn floating provision.
• Credit growth: Targets ~18% credit growth for FY24-25. ◼ Q2 credit growth has been slightly faster in the Rest of India (RoI) vs its home state due to higher ticket corporate loans disbursed in RoI. Management expects strong credit demand in its home state on account of tourism and agriculture-related activities.
• Asset quality: Targets for FY24: GNPA 4.5%, NNPA >1%, slippages 1.25-1.5%. Targets GNPA of 3.1% by FY25. Restructured book is doing well and management does not expect negative surprises from it.
• Capital: Targets raising Rs7.5bn through equity issue in this quarter.

Our view

J&K Bank has shown strong loan growth since abolition of Section 370 from state of Jammu & Kashmir, wherein strong funds investment and growth have been seen for local Bank. Micro economy has seen strong recovery after Covid-19 break through and Indian economy is likely to be in bright spot. Economy is likely to gain strong momentum and GDP growth will growth as demand for credit and infrastructure development boosting credit growth of Indian banking sector. We recommend to buy J&K Bank and add dips for price target 124-148, keeping in mind Strong support near range of 92-88 Levels. Expecting forward EPS for F.Y 23-34 to 12.25 and F.Y 24-25 to 13.89