>JAMMU & KASHMIR BANK (FINQUEST)

Dominant presence in J&K region…..
JKB has the most dominant franchise among all banks (350 branches) in J&K region. We believe
that JKB is best placed to benefit from any uptick in economic activity through massive infrastructure push by the central and state government. JKB has 75% market share in lending
and 65% in deposits in J&K region. We believe that investment of INR 350 billion in the J&K region will provide adequate stimuli for accelerated credit growth to JKB.

Strong business growth….
We expect JKB to post strong growth with 20% CAGR in advances (v/s10% in FY09) and 17% in deposits through FY09-FY11E. However, advances in the J&K state will grow at the rate of ~30% YoY over the next two years. Since, ~50% of the bank's advances are outside J&K, overall growth in advances will remain at 20% due to muted growth (~10%) outside J&K.

Asset quality to remain stable
JKB has brought down its net NPA level from 1.4% in FY09 to 0.8% in Q1FY10 by increased NPA provisions. The Bank's provision ratio increased from 50% in FY09 to 69% in Q1FY10. Going forward, we expect provision coverage to remain at ~55% and NPAs to be at manageable level with GNPA at 2.8% and NNPA at 1.3% by FY11E.

NIMs to improve
We expect Bank's NIMs (calculated) to increase by 20-25 bps to 3.2% through FY10 -FY11E due to strong credit growth leading to higher CD ratio. The CD ratio is expected to increase from 63% in FY09 to 65% and 66% in FY10E and FY11E respectively. Moreover, bulk of the loan growth would be in the J&K region where loan yields are relatively higher leading to better NIMs.

Return Ratios…to inch up
Due to higher credit growth as compared to previous year, we expect return ratios to improve.
RoE is expected to increase to ~18% in FY11E from 16.5% in FY09 led by 19.5% CAGR growth
in profits. With a CAR of 14.9% (Basel II) the bank is sufficiently capitalised to expand its loan
book at a higher rate.

Compelling valuations…
JKB is among the cheapest bank available at 0.8x FY11E ABV despite superior operational
performance. The Bank continues to trade at 30-35% discount to large PSB's and ~20% discount
to mid size PSB's. In our view, the valuation gap (J&K versus other mid size PSU banks) is
unjustified and will narrow in the near future. We initiate coverage on JKB with a target price of
638 (INR 550 for Bank and INR 88 Metlife stake) and Buy recommendation.

Concerns
Political crisis or strikes/protests would impact business operations of the bank. Deterioration in asset quality would result in higher provisions and decline in earnings.

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