We have a ?reduce? rating on Jammu and Kashmir Bank Ltd and maintain our negative outlook. We roll forward our target price to R1,300 (from R1,250), which would imply 1x P/B and 6x EPS.
We are less comfortable on the growth within J&K in segments like priority sector where we believe that the NPL risk is significantly higher. Outside J&K, the bank has a high exposure through consortium lending, which includes sectors like infrastructure, where the risk of loan impairment is high, and we see rising competition in the home state from new private banks with HDFC Bank steadily expanding the share in liabilities in recent quarters. At these valuations, we find better value in Federal Bank.
The niggling issues persist. We remain puzzled on the movement of restructured loans as there has been a reduction of 15% of Q2FY14 (~33% of FY13) restructured loans. The extended period of NIM expansion corrected this quarter by 35 bps q-o-q.
We remain concerned on the bank?s growth strategy as it focuses on the high-risk agriculture segment within J&K while we retain our cautious outlook on the portfolio outside the state. J&K Bank reported earnings growth of 11% y-o-y, but primarily led by reversal in NPL provisions and lower tax rate.
