Concerns for J&K Bank over near-term growth

Incremental restructuring likely to rise, loan disbursement to be slower after the floods

Concerns surrounding Jammu and Kashmir Bank (J&K Bank)'s asset quality over the past six months have only deepened after the recent floods in J&K.

Analysts estimate the floods to have affected about 300 of the 683 branches the bank has in J&K that accounted for about 45 per cent of its loan book and 69 per cent of deposits as of June. The flood could hit credit offtake, asset quality and profitability (thus, return ratios). The next two-three quarters are likely to be stressful for the bank, believe analysts.

While incremental credit growth will come down, the bank's asset quality could worsen leading to higher restructuring. "Restructured assets of J&K Bank, as on Q1FY14, stands at 3.1 per cent of the credit at Rs 1,390 crore and may increase by another Rs 200-500 crore on account of the calamity. Hence, incremental provision may impact profit by 2-3 per cent in FY15," says Kajal Gandhi at ICICI Securities.

The bank's asset quality had come under pressure in the June quarter, as one big agriculture account (exposure of Rs 700 crore) and a real estate account (Rs 270 crore) were restructured, which though analysts believe might be upgraded this financial year.

For the non-J&K book as well, asset quality pressures are expected to rise from here on. While analysts have not yet factored the asset quality pain (in their estimates) that could arise from floods, they expect the gross NPA ratio to inch up to 2.5 per cent this fiscal versus 1.7 per cent in FY14.

There is a flip side. Even as J&K Bank is the largest banker in the state, it has the lowest gross NPAs (2.3 per cent) displaying its better relationship with borrowers, notes Pritesh Bumb of Prabhudas Lilladher in his report.

Another silver lining is that RBI usually allows banks to restructure loans affected by natural calamities. For the stock, analysts believe, valuations have become undemanding at 1.1 times price to estimated FY15 book value post its over 20 per cent fall since June. However, given near-term growth and profitability headwinds, the stock may not move up in a hurry. The average target price of analysts polled by Bloomberg this month at Rs 147 also indicates limited upside from the current Rs 144.40.