By Jindal Haria

India Ratings and Research (Ind-Ra) has revised Jammu & Kashmir Bank Ltd’s (JK Bank) Outlook to Negative from Stable while affirming its Long-Term Issuer Rating at ‘IND AA’. The instrument-wise rating actions are as follows:

Instrument Type

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Basel III compliant Tier 2 bonds*

-

-

-

-

INR20,000

IND AA/Negative

Affirmed; Outlook revised to Negative from Stable

Lower tier 2 bonds*

-

-

-

-

INR6,000

IND AA/Negative

Affirmed; Outlook revised to Negative from Stable

* Details in annexure

 

Subsidiary: Ind-Ra has considered J&K Bank’s subsidiary JKB Financial Services Ltd. in its analysis.

KEY RATING DRIVERS

Outlook Revision: The Outlook revision reflects Ind-Ra’s expectations of JK Bank facing capitalisation pressure (especially common equity tier 1; CET1) in view of its high growth aspirations and of continued pressure on asset quality. While the bank expects to receive an equity infusion from the government of Jammu and Kashmir, there is limited articulation from the government on the timing and quantum. Jammu and Kashmir’s GSDP rose at a CAGR of about 10% over FY14-FY18. JK Bank targets 20%-25% annual growth in advances for the next two years in the state (overall credit growth of about 20% annually). The bank could face an adverse borrower selection risk in the medium term.

 

JK Bank’s CET1 ratio was about 8.66% in 1HFY19 (FY18: 9.24%). In Ind-Ra’s assessment, the equity capital level is lower than of the levels observed for peer private sector banks with an ability to grow 15-20% annually. In addition, JK Bank’s internal accruals are likely to remain modest, as the credit cost pressure remains. Growth moderation and high capital buffers would be key monitorables for the resolution of the Outlook.

 

Modest Asset Quality: JK Bank has been expanding its loan portfolio at a significant pace of about 23% in the 18 months ending October 2018, leading to an unseasoned portfolio. The loan growth has largely been in Jammu and Kashmir (33%). The gross non-performing asset (GNPA) ratio of JK Bank remained stable at about 9% in 1HFY19 (FY18: 10%; FY17: 11.2%), primarily on account of a sharp increase in net advances (1HFY19: INR636.9 billion; FY18: 569.1 billion FY17: INR498.1 billion) and write-offs. The bank wrote off about INR23 billion over FY17-FY18. The slippages (1HFY19: 3% annualised; FY18: 6%; FY17: 7%) were primarily driven by the bank’s corporate exposure outside Jammu and Kashmir and special regulatory debt restructuring on account of sociopolitical disturbances in the state in FY17.

 

Ind-Ra expects the slippages to remain lower than the FY18 level, but elevated. In Ind-Ra’s view, ageing NPAs and fresh slippages could contribute INR15 billion-20 billion to credit costs over FY19-FY20. The bank’s exposure to an infrastructure and financial conglomerate that has witnessed credit deterioration is about INR10 billion. The exposure was classified as standard at end-September 2018.  The bank’s restructured portfolio of about INR50 billion, 74% of which is represented by Jammu and Kashmir and is granular, witnessed deterioration in 1HFY19. However, in JK Bank’s view, GNPAs in this portfolio are likely to remain at 5%-10%, based on these borrowers’ repayment behaviour.

 

Moderate Profitability: JK Bank has a wide net interest margin of 3.5%-4.0% since FY14. The margin is likely to be maintained in view of low-cost deposits, which form over 90% of the total borrowings, and the bank’s ability to command higher yields on the Jammu and Kashmir portfolio. Growth in the advances portfolio, especially in Jammu and Kashmir, has the capability to expand the pre-provisioning operating profit and provide higher ability to tolerate credit costs. Nevertheless, it increases the concentration risk the bank would face. However, credit costs are likely to be the most important driver of profitability in FY19 and FY20. Ind-Ra expects the bank to register moderate profit for FY19-FY20 after accounting for the provisioning cost for ageing NPAs and fresh slippages. JK Bank reported a higher cost-to-income ratio of about 62% for 1HFY19 (FY18: 59%; FY17: 56.9%) on account of a 50bp yoy compression in yields that was not fully offset by a reduction in cost of funds.

 

State Support Key to Maintain Capital Adequacy: Although JK Bank’s CET1 (1HFY19: 8.66%; FY18: 9.24% against the regulatory requirement of 8.00% under Basel III transition without taking into account the proposed relaxation in capital conservation buffers) capital position is relatively better than that of peers, the bank plans to grow at about 20% annually over the next two years, with the majority of the growth contributed by Jammu and Kashmir.

 

Ind-Ra expects JK Bank to witness credit costs of INR15 billion-20 billion over FY19-FY20 and, thus, lead to lower accruals and higher capital consumption. In addition, Ind-Ra expects the bank to require INR5 billion-10 billion of equity to maintain adequate capital buffers, as its ability to tap capital markets is limited. The bank plans to sell some non-core assets to meet a part of its requirement. Ind-Ra expects INR2 billion-3 billion of capital release as a large part of restructured assets in Jammu and Kashmir, on continued performance, are reclassified as standard post December 2019. The Jammu and Kashmir government has infused equity in the bank in the past, when required. Therefore, Ind-Ra expects similar support, as and when required.

 

Comfortable Liquidity: JK Bank’s asset-liability tenure is well matched. Moreover, it has no cumulative negative mismatches up to the one-year bucket. In fact, at 1HFYE19 it had about 5% of surplus in the short term. The short-term surplus is supported by a high current account savings account ratio of 49.3% in 1HFY19 (FY18: 51%; FY17: 51.7%), along with sticky deposits originating from state government bodies, regional banks and trusts.

 

Ind-Ra expects the liquidity of JK Bank to remain comfortable in the short to medium term in view of the factors mentioned above. The bank’s liquidity coverage ratio was about 368.69% at 1HFYE19 against the regulatory requirement of 90% until December 2018 and 100% thereafter.

 

Systemic Importance: The ratings reflect continued financial support from the government of Jammu and Kashmir (FY17-FY18: INR5.3 billion of equity infusion). Considering JK Bank is a dominant bank in the strategically important and socio-politically sensitive state of Jammu and Kashmir, it is of high systemic importance and plays a major role in the state economy and acts as one of the two agent banks of the Reserve Bank of India. At end-September 2018, the bank represented nearly 792 branches of the overall 1,764 bank branches (of scheduled commercial banks) in the state.


RATING SENSITIVITIES

Positive: A positive rating action could result if the bank’s capital buffers, in the agency’s opinion, are significantly higher than regulatory levels and adequate to meet the growth ambitions of the bank and withstand capital erosion in case of high credit costs.

 

Negative: There could be a negative rating action if the quantum and the timeliness of capital infusions from the state government do not substantiate the agency’s view of the special status of JK Bank. The special status needs to be demonstrated by the maintenance of strong capitalisation to manage growth and cover credit costs, as well as of reasonably high buffers above the regulatory levels.


COMPANY PROFILE

Srinagar-based JK Bank was established in 1938 by the state government and remains majority owned (59% as of July 2017) by the state government.

 

FINANCIAL SUMMARY

 

Particulars

FY18

FY17

Total assets (INR million)

896,876

820,187

Total equity (INR million)

61,612

56,764

Net income (INR million)

2,027

-16,323

Return on average assets (%)

0.2

-2.0

CET 1 (%)

9.2

8.7

Source: JK Bank’s annual report


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

15 Dec 2017

5 May 2016

2 September 2015

Issuer rating

Long-term

-

IND AA/Negative

IND AA/Stable

IND AA/Stable

IND AA/Stable

Basel III compliant Tier 2 bonds

Long-term

INR20,000

IND AA/Negative

IND AA/Stable

IND AA/Stable

-

Lower tier 2 bonds

Long-term

INR6,000

IND AA/Negative

IND AA/Stable

IND AA/Stable

IND AA/Stable

ANNEXURE

ISIN

Instrument

Date of Issue

Coupon Rate (%)

Maturity Date

Issue Size (million)

Rating/Outlook

INE168A08038

Basel III compliant Tier 2 bonds

24 March 2017

9.50

24 June 2022

INR5,000

IND AA/Stable

INE168A08046

Basel III compliant Tier 2 bonds

28 December 2017

9.25

27 December 2024

INR5,000

IND AA/Stable

 

Total unutilised

 

 

 

INR10,000

 

 

Total

 

 

 

INR20,000

 


ISIN

Instrument

Date of Issue

Coupon Rate (%)

Maturity Date

Issue Size (million)

Rating/Outlook

INE168A08012

Lower Tier 2 bonds

30 December 2009

9.00

30 December 2019

INR6,000

IND AA/Stable

 

 

 

 

 

 

 

 

Total

 

 

 

INR6,000

 




COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

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Analyst Names

  • Primary Analyst

    Jindal Haria

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001750

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121