India Ratings and Research has assigned a stable outlook to Jammu and Kashmir Bank's Rs 600 crore lower Tier II notes and said the instrument carry very "low credit risk".
"India Ratings and Research (Ind-Ra) has affirmed Jammu and Kashmir Bank Ltd's (JK Bank) Long-Term Issuer Rating and INR6bn lower Tier II notes at 'IND AA' with a Stable Outlook," the agency said in a statement.
'IND AA' instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.
JK Bank's ratings are driven by a continued moderate possibility of support from the Government of India, through the J&K state government, if required, Ind-Ra said.
"This factors in the bank's central role in sustaining the economy of the politically important state of J&K, it being the only dividend paying state-owned enterprise, its dominant position in the banking business in J&K state and with state employees, and its role as the RBI's main agent for conducting the general state government business," the agency said.
The bank's high exposure to stressed sectors such as metals, real estate and infrastructure and stressed corporates could result in further asset deterioration.
In Ind-Ra's opinion, the additions to NPAs in 2015-16 could be higher than expected for most other banks, but lower than observed for JK Bank in 2014-15.
"Further, the bank is expected to take lower exposures to large corporates unlike observed in the past. Asset quality also remains susceptible to potential political/economic volatility in J&K and the nation-wide economic slowdown," it said.
Ind-Ra said JK Bank's profitability weakened in 2014-15 due to the provision requirements for corporate NPAs.
It would have weakened more if not supported by a high current and saving account ratio, strong liquidity profile and lower-than-peers' cost-income ratio.
Capitalisation, it further said has been satisfactory till date with JK Bank's Basel III common equity Tier I ratio of 11.26 per cent at 2014-15.
The September 2014 floods resulted in JK Bank reporting Rs 500 crore of restructured assets mostly in trade and SME segments in 2014-15.
