J&K bank’s NII (net interest income) grew modestly at 11.7% to Rs2.51 billion in Q4FY09 from Rs2.24 billion in Q4FY08 on back of moderate loan growth (10.8%), decline in C/D ratio from 66.0% at the end of FY08 to 63.4% at the end of FY09 and 21 bps decline (y-o-y) in NIM to 2.97% during Q4FY09.
Net Profit grew 31.6% to Rs.0.79 billion in Q4FY09 from 0.60 billion in Q4FY08 despite modest growth in NII (11.7% y-o-y), due to strong growth in non-interest income (23.7%) and 24.2% decline in tax provisions.
The bank consciously chose to go slow on its balance sheet growth in the prevailing uncertain economic environment.
Its business both deposit as well as advances grew slower than the industry average. They grew 15.4% and 10.8%, respectively during Q4FY09.
Non-interest income rose 23.7% to Rs.997.3 million during Q4FY09 from Rs.806.3 million during Q4FY08. Fee income grew 22.2% during Q4FY09, while trading income and insurance distribution income increased 38.7% and 46.2%, respectively.
Capital adequacy ratio (CAR) stands at 14.48% at the end of Q4FY09, with Tier-I and Tier-II standing at 13.8% and 0.68%, respectively.
Valuation and recommendation
At the current market price of Rs.504, the stock is trading at 5.4x its FY10E earnings and 1.0x its FY10E ABV.
We have slightly tweaked our earnings estimates for FY10E and now expect net profit to be Rs.4.49 bn. This will result into an EPS of Rs.92.6 and adjusted book value of Rs.520.9 for FY10E.
We are maintaining ACCUMULATE rating on the stock with a target price of Rs.556 (revised upward from Rs.448 earlier).
At the target price, the stock would trade at 1.07x its FY10E adjusted book value (assigning 75:25 weights to historical multiple and fair multiple based on single stage Gordon Growth Model, respectively).