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.
