JKBK reported net loss of Rs 5.5b in Q4FY17 owing to elevated credit costs (~5% annualised). High provisioning was on account of high net stress addition (~2.8% net slippage ratio) and a strong focus of management to clean up balance sheet calculated PCR rose to ~59.6% v/s 52.8% in Q3. Strong recoveries and upgrades at Rs 3.6b Q4 is seasonally strong helped partly offset high stress additions Rs 6.5b v/s Rs 1.9b in Q3. Focus on increasing PCR led to a 10% sequential decline in NNPAs 4.9% of loans v/s 6% in Q3. Stock of restructured loans stood at Rs 63.8b, 11% of loans, of which Rs 44b pertained to J&K state. The bank implemented Rs 3.1b in S4A and Rs 1.1b in SDR during the quarter. NII grew 12% q-o-q (+1% y-o-y), led by strong sequential loan growth (+10% q-o-q) and a sharp improvement in NIM to 3.5%.
Despite net income growth of 11% q-o-q, high opex (+23% q-o-q) led to a 6% q-o-q fall in PPoP (-27% y-o-y). Operating costs were impacted by one-offs due to depreciation adjustment on revalued assets of ~Rs 150m, Rs 250m digitalisation expenses and Rs 250m principal settlement related. Loan growth was flat y-o-y but grew 10% q-o-q; share of J&K state loans stood at ~50% v/s 48.6% in FY16. CASA ratio stood at 51.7% +760b y-o-y – highest ever; SA deposits grew 19% y-o-y. The bank is on track to close a capital raise of Rs 2.82b second tranche by 25 May – we expect capital augmentation efforts to continue 8.7% Tier 1.
While we like management’s focus to clean up balance sheet, continued high stress additions and high proportion of restructured book remain a cause for concern. Recoveries/resolutions in non-J&K state corporate portfolio (19% NPA) will be a significant trigger for the bank. We cut estimates sharply to factor in high provisioning focus on increasing PCR.
Guidance on Credit cost: sub 2% levels. The management targets to take PCR to 70% by FY18 and 90% in 2-3 years. Incremental provisioning will be significantly lower than FY17 levels as large part of balance sheet clean-up is complete. Of the total Rs 63.8b restructured accounts, Rs 44b pertains to J&K state, Rs 4b provisions on these. Window for restructuring was closed on February 28. The bank does not see any issues in these accounts – assets are intact, there has only been disruption in the cash flows due to civil unrest.