Jammu Kashmir bank was one of the top five investments of our portfolio at this time last year. And then the news emerged about the NPA’s in the mid of the last year. The stock had shredded almost 75% from 12 month high of Rs 177 to down Rs 95 two weeks back.

We rate Jammu and Kashmir bank as an A1 quality rate as on March 2014 results. We think that will fall down to A2 quality for the year 2015, which is still an investment grade business.

Let us analyse the nine months results for the year 2015, the interest income had jumped by 7% and the total income had jumped by 7% with compare to last year results. But the Net profits have fallen down by 56%. Let us look into the table below and understand what really happened.

Dec 2014 % Dec 2013 %
Interest earned 5316 94 4990 95
Other Income 316 6 279 5
Total Income 5632 100 5269 100
Interest Expended 3348 59 3006 57
Operating Expenses 1023 18 844 16
Provision and Contingencies 635 12 87 1
Taxes 219 4 399 8
Net Profit 407 7 932 18


The major difference in the numbers is in Provision and contingencies. The Net NPA’s stand at Rs 1428 crore which in percentile comes to 3.22%. The speed at which they are writing down or provisioning, we think in the next two or three quarters they will be back on healthy profits.

We are not worried about the profitability of this business because if you add provisions and Net Profits for the both period (12+7=19 and 1+18=19) are the same. As long as bank has fixed its lending practices and control its NPA’s we think this is a great business to invest with.

Coming to the valuations, the bank has destroyed its intrinsic value in the current financial year. The long term trend of historic intrinsic value has changed into negative but looking from here on it looks it will start climbing up.

The consensus estimate its 2015 earnings to be Rs 12.25 and Rs 17.56 for the year 2016. Considering those estimates while calculating its values we think Jammu and Kashmir is trading at discount of 5% – 7% today.

PE 2015 PE 2016 Price/ Book Value 2015 Price/ Book value 2016
JK Bank 8.32 5.80 0.74 0.70
HDFC Bank 24.82 20.10 4.90 4.25
Axis Bank 18.32 15.41 3.06 2.69
CUB 14.06 11.97 2.52 2.28
SBIN 15.88 12.31 1.33 1.22
ICICI Bank 16.39 13.93 2.31 2.22


Again, we own few stocks of Jammu and Kashmir in our portfolio. As per our research we are not worried a lot about its NPA’s as they will come under control in 2 -3 quarters. The only concern for us is the growth in its top line business (expected 7% in 2015). Any fall in its top line or NPA’s not getting under control in next 2 – 3 quarters can change our opinion.

A reminder, consider this post as a second opinion in regards to Jammu and Kashmir Bank. Do your own research and if you want to discuss anything in regards to this business than please feel free to raise your concerns through comments.