J&K Bank: Strong 3Q performance

The third quarter earnings season for the banking sector started on a positive note with encouraging financial performance from Jammu & Kashmir Bank (JKB). The bank recorded a 41% rise in earnings and 27% growth in interest income for the nine months ended December 2001.

(Rs m)	3QFY01	3QFY02	Change	9mFY01	9mFY02	Change
Income from operations	2,719	3,355	23.4%	7,866	9,954	26.5%
Other Income	259	633	144.7%	695	1,439	107.0%
Interest expense	1,855	2,248	21.2%	5,312	6,825	28.5%
Operating Profit	559	733	31.1%	1,495	1,779	19.0%
Operating Profit Margin (%)	20.5%	21.8%		19.0%	17.9%
Other expenses	305	374	22.7%	1,060	1,350	27.4%
Provisions and contingencies	91	452	395.3%	396	770	94.4%
Profit before Tax	726	913	25.8%	1,794	2,448	36.5%
Tax	215	250	16.3%	550	700	27.3%
Profit after Tax/(Loss)	511	663	29.8%	1,244	1,748	40.5%
Net profit margin (%)	18.8%	19.8%		15.8%	17.6%
No. of Shares	48.1	48.2		48.1	48.2
Diluted Earnings per share*	42.4	55.1		34.4	48.3
P/E Ratio		0.8			1.0
*(annualised)

Unlike other banks, JKB's interest on advances income grew by 48% in the first nine months accounting for 46% of total interest income. The bank's 25% of total loans are to the retail sector (home loans, personal loans and auto loans), which has fueled its overall interest income growth. Income from investments on the other hand grew at a slower rate of 16%.

The bank has successfully improved its operating margins by about 130 basis points on the back of more than proportionate reduction in deposit cost (compared to lending rates) and cost control measures. JKB's cost to income ratio declined to 22% in 3QFY02 from 27% in the comparable previous quarter. For the first nine months, the ratio stood at 30% (33% in 9mFY01). JKB’s cost of deposits at about 7% is amongst the lowest in Indian banking sector, as 40% of its deposits are low cost deposits.

Over 100% growth in other income figure was the key earning driver in the third quarter. The proportionate contribution of other income to total income jumped to 16% from 9% in 3QFY01. However, a five fold increase in provisions and contingencies amount trimmed the bottomline growth of the bank. The bank's net NPA to advances ratio stood at 2.5% as on March 2001.

At the current market price of Rs 46 JKB is trading at a P/E of 1x and Price/Book value ratio of 0.3x nine months FY02 annualised earnings. The bank's lower valuations are the result of its public sector status (53% stake held by the government of J&K), regional nature and risk of concentration of business in one region (most part of its deposits are from J&K but lending is spread across India).