KEY RATING DRIVERS
The bond rating has been equated to JK Bank’s Long-Term Issuer Rating (according to Ind-Ra’s rating criteria) which reflects the bank’s systemically important position in the state of Jammu and Kashmir (J&K). JK Bank including J&K Grameen Bank accounted for 46% of the state’s branches and 66% of the state’s deposits and advances in FY15. The rating also reflects the continued moderate possibility of support from the government of India (GoI) to JK Bank, through the J&K government, if required. This factors in the bank's central role in sustaining the economy of the politically important state of J&K and its role as the Reserve Bank of India’s main agent for conducting the general state government business.
The bank’s gross NPAs increased to 6.8% in 9MFY16 (FY15: 6%) while stressed assets increased to 10.9% (10.6%), both comparable to its peers’; bulk of this stress is from the corporate loan portfolio outside of J&K. The bank’s high exposure to the stressed sectors such as metals, real estate and infrastructure and stressed corporates could result in further asset deterioration. The bank’s growth strategy outside the state has met with limited success and hence the bank plans to grow largely in J&K. The bank’s asset quality also remains susceptible to potential political/economic volatility in J&K, state-wide natural disasters and the nation-wide economic slowdown. However, the central government’s stated INR1,000bn support plan for rehabilitation, industry and infrastructure development in the state could flow in the state’s economy largely through JK Bank. Further, the bank is likely to continue decreasing the share of corporates (9MFY16: 50%; FY15: 50%; FY14: 57%).
JK Bank’s profitability weakened after FY14 due to the provision requirements for corporate NPAs. It would have weakened more if not supported by strong liquidity profile, a high current and saving account ratio (9MFY16: 43%), and lower-than-peers’ cost-income ratio (FY15: 43.4%; FY14: 38.2%). Although the expanding branch networks of other banks in J&K is increasing competition for deposits, Ind-Ra expects JK Bank to continue to dominate the bank’s business in the state based on its systemically important position. The bank’s profitability is likely to improve due to its increasing share of higher margin loans in the state; however, the positive impact will partly be offset by the bank’s strategy of increasing the provision coverage ratio (excluding technical write-offs) to 70% in FY17 from 66% in 9MFY16 (FY15: 59%).
Capitalisation has been satisfactory till date with JK Bank’s Basel III common equity Tier 1 ratio of 11.15% at 9MFY16. The bank has reduced its loan growth target to 18%-19% CAGR till FY19 (from 25% earlier). It is likely to require INR22bn of Tier 1 capital (of which CET requirement is up to INR5bn i.e. 8% of FY15 CET) up to FY19 at 19% growth in risk-weighted assets and 20% dividend payout ratio. Ind-Ra expects the management and the state government to undertake timely capital planning.
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