MOSL: J&K BANK (Neutral)-Balance sheet clean-up phase-high provisioning leads to pre-tax loss

​&K Bank: Balance sheet clean-up phase; high provisioning leads to pre-tax loss

(JKBK IN, Mkt Cap USD0.6b, CMP INR81, TP INR89, 10% Upside, Neutral)

• JKBK reported net loss of INR5.5b in 4QFY17 owing to elevated credit costs (~5% annualized). 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 3Q).
  
• Strong recoveries and upgrades at INR3.6b (4Q is seasonally strong) helped partly offset high stress additions (INR6.5b v/s INR1.9b in 3Q). Focus on increasing PCR led to a 10% sequential decline in NNPAs (4.9% of loans v/s 6% in 3Q). Stock of restructured loans stood at INR63.8b (11% of loans), of which INR44b pertained to J&K state. The bank implemented INR3.1b in S4A and INR1.1b in SDR during the quarter.
  
• NII grew 12% QoQ (+1% YoY), led by strong sequential loan growth (+10% QoQ) and a sharp improvement in NIM to 3.5% (+50bp QoQ).
  
• Despite net income growth of 11% QoQ, high opex (+23% QoQ) led to a 6% QoQ fall in PPoP (-27% YoY). Operating costs were impacted by one-offs due to a) depreciation adjustment on revalued assets of ~INR150m, b) INR250m digitalization expenses and c) INR250m principal settlement related.