Wow! No activity on this thread at all for the last 2 years, that alone makes me hopeful that there is a good case to relook at this situation.
Im no expert on banks which I know are among the most difficult cos to understand and value as there is no way for a lay investor to know the quality of loan assets.
However it looks to me that the valuations for this bank have been beaten down so much this is now perhaps a Grahamian net-net situation.
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Total Assets (adjusted for net NPA) of 86893 cr now available at a mkt cap of 3202 cr ie 3.68% of assets
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Cash balance 3931.6 cr+ RBI balance of 4328.36 cr = 8260 cr vs mkt cap 3202 cr so its trading at 39% of the actual cash on balance sheet. Share price 57.50 vs cash 148 per share.
Compare this to the most beaten down pvt banks like LVB and South Indian bank.
LVB: mkt cap 2908 cr vs cash 316.79+RBI bal 1698.17=2014.16, mkt cap to cash 1.4
South Indian Bank : mkt cap 4370 cr vs cash 962.81 and RBI bal 3258.24=4221.05, mkt cap to cash 1.03
J&K bank is at 0.39. -
The bank also has g secs worth 17197 cr
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In addition, the bank owns 5.08% of PNB Metlife, which PNB is now desperate to list via an IPO for which papers have already been filed, with an initial estimated valuation of 8000 cr, so J&K bank would have a liquid asset that they are quite willing to dispose of worth 400 cr. This is carried at 102.19 cr on the balance sheet.
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The share last traded at this level in 2009 so its a 9 year low.
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The bank dominates banking in J&K and has done so almost since the time it was established in 1939, to the extent that it now accounts for around 63% of deposits and loans so its got pretty much a captive depositor base. No other bank really counts in this state (there are only 8 major banks), and as far as I can determine, private banks are not very keen to expand here (only HDFC+ICICI are present). PSBs are anyway in no position to expand now. CASA % is 50.89% and has been 50%+ in the past as well. This is probably why the bank got into trouble in the first place with bad loans, as they get plenty of cheap money with cost of deposits of only 5.01% whereas theres not been that much scope to deploy the money in the state itself. The point is its got a very strong franchise, and although as with most banks, they made a lot of bad loans in the past, they are in a much better position to build themselves back up with such a strong base. This process has already started.
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Capital Adequacy ratio is 11.42% and the bank will be raising capital upto 1000 cr via QIP. The J&K state govt has a infused a total of 532 cr in FY17 & FY18 via pref allotment at Rs 68 & Rs 79 respectively, the govt stake is now 59%.
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The bank has a provision coverage of 65.83% which is among the highest and mgt does not expect major additional slippage. Gross NPA 6007 cr (11.2%), net NPA 2791 cr (4.9%)
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Business seems to be turning around and the mgt is optimistic on growth prospects within the state. Credit growth in FY18 has been 14% and NIM has been 3.65% which is already among the highest, and mgt indicates high degree of confidence in NIM getting better.Deposit growth was 10.41%.
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A big chunk of their NPAs comes from 2 accounts: Bhushan steel and Essar steel, which seem to be near resolution or atleast look like they could be resolved by the end of the year with not too much of a hair cut.
Risks
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Civil unrest situation may intensify in J&K which will impact business and NPAs
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There are some restructured assets from the 2014 floods and unrest period in 2016 that may slip. Restructured book of 4,794 cr : 700cr is due to floods (in FY15) and 3,700 due to civil unrest. The RBI provided moratorium period for the 700cr got over on Dec’17.
On the repayments : The government has announce a budgetary subsidy of 1,000cr, wherein borrower will pay 2/3rd of the total amount and 1/3rd (interest burden) will come from state government. This state assistance should limit the possibility of defaults, also with the bank so dominant in the state, I would imagine no local would want to get onto the banks bad books. -
Possibility of upto 25% equity dilution due to capital raising, however this should help business growth hence should be beneficial in the longer term.
So overall it looks like a really good investment case to me.
However there may well be aspects I have not understood properly that would undermine the investment case, so input from senior members would be welcomed!
All figures quoted above are as of March 31st,2018. Mkt cap and share price as of today.
Im also including here:
The FY18 annual report
JKAR1718.pdf (2.7 MB)
PNB Metlife IPO plans and valuation
Disclosure: Invested, 42% of stock portfolio.