Monopoly Bank in India?? Jammu and Kashmir Bank

Jammu and Kashmir Bank (NSE:J&KBANK)

Business Overview:

Incorporated in 1938, J&K bank is promoted by the government of Jammu and Kashmir State which holds 53.17% stake in the bank. J&K bank functions as a universal bank in Jammu and Kashmir and as a specialist bank in rest of the country. It carries out all the banking business of the central government besides collecting taxes for Central Board of Direct Taxes in J&K.

J&K bank follows a 2-legged business model whereby it seeks to increase lending in its home state, which results in higher margin despite lower volume and seeks to capture niche lending opportunities in other states to build volume and margins.

It operates in four segments: treasury, corporate/whole sale banking, retail banking and other banking business.  The Bank’s investments are classified into held-to-maturity, available-for-sale and held-for-trading categories. The Bank established 92 new branches in 2014, thereby taking the number of branches to 777. The bank also added 187 new automated teller machines (ATMs) both onsite and offsite. The J&K Grameen Bank is the regional rural bank sponsored by the J&K Bank. J&K bank is listed on both NSE and BSE and has a track record of uninterrupted profits and dividends over 4 decades. It is rated as A1+, FAA+ including the highest degree of safety rating by CRISIL.

Bank's Mission:

"Our mission is two-fold, "To provide the people of Jammu and Kashmir international quality financial services and solutions and to be super specialist bank in rest of the country". This strategy is intended to make us one of the best banks in the country." – Annual Report 2014

Dominance:

J&K bank holds 65% of total bank deposits in the state which talks about dominance vs the competition. The bank also has a market share of 67.5% of housing loans and 75.9% of agriculture loans in the region. Dominance comes with responsibility and brings the possibility to earn good return on invested capital. Imagine competing with such a dominating player in a highly regulated industry like banking.  Getting a new banking license in India is very difficult as there are only 2 new licenses are given in last 10 years.

Quality of the bank:

By the below metrics, the bank displays all the elements of excellent banking starting from attracting low cost deposits, high return on assets, high net interest margin and high Return on Equity. Book value per share is not adjusted for the stock split (10 for 1).

Management capability:

This bank is a government controlled bank with a profitability metrics of a private bank. Return on Assets have been over 1.5% (very few banks in US achieve this), Return on Equity is over 20% (almost no bank in US achieve this), book value per share increased over 20% historically, conservative dividend payout of 20% and reinvesting the remaining 80% of earnings back into the business. Net Interest margin is highest (4.1%) in the industry and Capital Adequacy Ratio under Basel III stood at 12.69% as of March, 2014 well above Reserve Bank of India stipulated norm of 9%. Mr. Mushtaq Ahmad is a chairman and CEO of the bank, has more than 41 years of experience in finance and in corporate/retail banking.

Historical Financial Overview:

Valuation:

This excellent bank is selling in the stock market today for 6500 Cr (Rs. 135/share), which is less than 6 times after tax earnings (~1200 Cr) and about 1 times book value (liquidation value). The best days of banking and India’s growth are still ahead. To interpret the numbers per branch, Average branch has approximately Rs.88 Cr ($14M) in Deposits and the market price of the bank is Rs.8 Crs ($1.3M). We don’t have to be geniuses to figure that the deposits at these branches are going to grow at reasonable rates, and so is the lending since the economic activities in India have more room to grow. We don’t need to be precise about the growth rate as we are not paying anything for the growth. Based on the market price today, the shareholder gets paid about 15% in earnings yield and 3.75% in Dividend yield. This is a very attractive valuation for a dominant bank. Let’s play with some numbers with various assumptions:

Rate of growth in Earnings (%)	Earnings in 5 years (Crs)	P/E multiplier	Market Cap potential (Crs)	Stock Price (Rs)
10	1932.612	10	19326.12	399.3
15	2413.628625	15	36204.42938	748.0254
20	2985.984	20	59719.68	1233.8777

Various stock price potentials in next 5 years measure well against the current price of Rs.135.

Major Owners of this company (other than the state):

Name of the Shareholder	Total Shares held	Shares as % of Total No. of Shares
Aberdeen Global Indian Equity Fund Mauritius Ltd	17180000	3.54
The Pabrai Investment Fund LP	12432560	2.56
Route One Investment Company L.P A/c Route One Fund I L P	8757700	1.81

Conclusion:

This investment opportunity measures well against my criteria’s,

Strong/dominant business with great economics and huge growth opportunities ahead P

Run by proven management with strong capability P

Selling at a price which is cheap relative to the current earnings and future potential P

Disclosure:

I/partnerships managed by me own shares in this company.