J&K Bank stock not ripe for bottom-fishing

It is likely to extend Thursday's fall amid earnings downgrades and weak financial results

Jammu and Kashmir (J&K) Bank's share price fell as much as 18 per cent before closing with a net decline of 14 per cent in Thursday's trade as the new management laid out the future road map.

Parvez Ahmed, chairman and chief executive since October 6, told investors in a conference call on Thursday that the bank was looking to "deep clean" its balance sheet and aimed to take its provision coverage ratio (PCR) to about 90 per cent over the next six quarters, from 50 per cent currently. PCR is the amount of money a bank has kept aside for potentially bad loans.

"Assuming the current non-performing assets (NPA) level, our estimate is that from Rs 976 crore in FY16, provisions could go up to Rs 1,800-2,000 crore this fiscal. Even higher if the bank adds more NPAs in the coming quarters," says Aalok Shah, analyst at Centrum Capital.

Since provisions are an expense in the profit & loss statement, such a leap will eat away a large chunk of the profit. J&K Bank's net profit was Rs 23 crore in the June quarter and Rs 416 crore in 2015-16. While higher provisions will pull down the bottom line, the Street will keep its eye on operating profit, which reflects the financial health more accurately. Any positive surprises could provide relief.

A key disappointment for investors and analysts was the management not giving more detail on the asset quality trends in its loans outside the state of J&K (half of all loans). A large part of these are part of consortium lending and could witness stress, estimate analysts. The management said J&K-based loans were witnessing higher asset quality stress amid the rising social tension in the state. Notably, the gross NPA ratio is already high at 9.3 per cent of loans as on end-June. However, Shah of Centrum says the bank's J&K book has not witnessed many delinquencies in the past and hope it will not be material, as borrowers' cash flow should improve over the next couple of quarters as the unrest eased a bit.

The management is also going slower on lending and expects the non-J&K loan book to grow 10-12 per cent in FY17 versus the 18-20 per cent estimated earlier. Slower growth will impact its net interest income in the interim. Analysts say it is a worry and the bank should go slower on growth, given the slow revival in the economy and the bank's priorities in cleaning the balance sheet. Overall, near-term financial performance is expected to remain weak and some analysts are likely to prune their estimates right after Thursday's announcement. These events will continue to keep the stock price under check.

Thus, despite the sharp fall on Thursday, investors are better off staying away from the scrip.