J&K Bank: Reaping peace dividend

INVESTMENT COUNTER

Even as winter is as cold as usual in Jammu & Kahsmir, its name sake bank's scrip is on fire. The scrip has rocketed to Rs 477 over the past one year, gaining 275 per cent.

If you ask analysts, this is what they would tell you: "J&K Bank has shown a consistent pace of growth and emerged as an efficient, profitable, financially-strong, technically-well-equipped and customer-responsive bank."

And for all that the stock was going cheap at a price-earnings ratio of around 2 last year. That made the scrip ripe for a re-rating. Now, after the phenomenal jump is there still scope for further gains? Analysts are optimistic.

There are two forces driving the bank's share price - anticipated boom in business on account of peace in J&K and the bank's efforts to diversify its basket.

Sound financials
What makes J&K Bank unique is its structure. Incorporated in October 1938, it has the unique distinction of being the banker to the J&K state government and has also been appointed by the Reserve Bank of India (RBI) as its agency in J&K, responsible for carrying general banking business of the central government and collecting taxes pertaining to the Central Board of Direct Taxes.

Nearly 42 per cent of J&K Bank's equity is held by the public, with the state government holding 53 per cent and financial institutions the rest.

Thanks to its status as banker to the state government, it has been able to clock fairly consistent profits for the past many years.

The bank posted a net profit of Rs 337.75 crore in fiscal 2003, recording an increase of 30 per cent over the previous year.

Its capital adequacy ratio for FY03 stood at 16.48 per cent which is comfortably higher than minimum 9 per cent as stipulated by the RBI.

The asset quality of the bank is also commendable. The bank has kept its non-performing asset (NPA) levels at the minimum possible level through enhanced recover drives and stringent credit norms.

The NPA levels for FY03 stood at 1.58 per cent (against 1.88 in the previous year), which is one of the lowest in the industry.

The bank's December quarter results, too, are impressive - net interest income increased 20.45 per cent to Rs 169.21 crore compared to the corresponding previous quarter; net profits jumped 23.12 per cent to Rs 109.8 crore.

Dividends for diversification...
Initially, when the bank started operations, it concentrated in the state. However, off late with a view to diversify and expand, it has opened branches across the country.

The bank has been more vocal about its diversification strategy recently. It has sanctioned Rs 600 crore worth of term loans to corporates and Rs 300 crore to Reliance Infocomm, the telecom company of the Reliance group, last year.

Other borrowers include Narmada Hydro-Electric Development Corp (Rs 100 crore) and Birla Home Finance (Rs 25 crore). The bank also plans to disburse Rs 100 crore to Tata Teleservices and Rs 50 crore to Petronet LNG. In the next big step ahead, J&K Bank may decide on a public offer next year to raise its capital base.

This would also help the bank expand its business, slated to top Rs 25,000 crore by the end of March 2004.

The bank is also said to have considered placing 10 per cent of its equity with FIIs but not immediately since it perceives that the stock is under-valued.

...and peace
If there was one reason why the stock did not command a decent valuation despite the bank's healthy financials, it was the turbulence in its home state.

"Though valuations always looked attractive, the uncertainty that surrounded the state hit the stock," says Sejal Doshi, banking analyst with Karvy Stock Broking, a domestic research house. People feared that any mild or major negative activity in the state would affect business in multiples.

Even more, analysts say there were issues regarding the involvement of terrorist money in the bank. But many of these concerns seem to have dispelled, with the bank posting consistent numbers year after year.

Besides, the central government has introduced several sops for the state in the form of new power and infrastructure development projects.

Analysts are now of the view that even a rise in tension on the border may not have an adverse impact on the banks' performance.

"Exposure in J&K is not as risky as anticipated since J&K Bank has deployed a substantial proportion of funds to the horticulture and handicraft industry," says a report by Khandwala Securities.

As per the report, despite tensions and increased terrorism in the state, handicraft and horticulture industry has performed very well during the last decade.

The bank has negligible exposure to hotel industry as tourism has been badly affected due to terrorism.

However, with the improvement in the tourism activities the bank may achieve higher volumes by lending to the hotel industry as well, analysts say.

Valuation not expensive
Lately, the stock price has been rising at the bourses indicating that the market is finally taking note of the stock.

The stock price has registered an increase of around 93 per cent in the last six months to the current levels of Rs 407.

"What could now change the valuations is a merger act," says a banking analyst with a domestic research house.

Peer valuations
J&K Bank's valuations improved after a series of good results
Bank	P/E
Corporation Bank	8.19
Oriental Bank	8.05
Bank of Punjab	7.95
Bank of Baroda	6.41
Punjab National Bank	6.32
J&K Bank	5.60
Vijaya Bank	5.07
Canara Bank	4.17
Federal Bank	4.13
Karur Vysya Bank	4.00
Bank of Rajasthan	3.58
Karnataka Bank	3.45
Union Bank of India	3.30
Bank of India	3.21
United Western Bank	3.20
Allahabad Bank	3.15
Indian Overseas Bank	2.72
Dena Bank	2.29

The bank can seek to merge or acquire another bank in some other part of the country to lessen its exposure to the state.

This will also help it get more business since operations in a focused area may soon saturate. Analysts say any south-based bank would be the best bet for J&K Bank.

Meanwhile, foreign institutional investors (FIIs) have raised their stake in the bank to 13.2 per cent in the quarter ended December 31, 2003 from 7.9 per cent in the previous quarter.

The new FIIs who have made fresh investments are Morgan Stanley Dean Witter (1.89 per cent stake), Goldman Sachs (1.88 per cent) and Merrill Lynch Capital Markets (1.26 per cent).

Analysts predict an EPS of around Rs 88 for FY04 and around Rs 104 for FY05. The report by Khandwala Securities reiterates the fact that on a P/E basis, J&K Bank is still undervalued compared to its counterparts.

According to analysts, the bank's share is still attractively valued going at a price-earnings multiple of around 4.5x.