Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Systemic support from J&K government and government of Ladakh, as J&K Bank is dominant player in the UT

While J&K Bank is relatively small in terms of size when compared to banking peers, it is the largest bank in the territory of J & K. Given its high systemic importance to the territory’s economy, the government of J&K has extended need-based support to the bank in the past and, shall continue to do so. The bank has received almost Rs 2000 crore from the government of J&K since August 2019. This strongly reflects the intent of the government to extend support to the bank on an on-going basis. More so, the government of J&K has retained majority stake in the bank even after the change in the political status of J&K and is expected to continue holding over 50% stake in the bank in the medium term.

The bank’s capital position has also strengthened following the rise in positive internal accruals, with overall networth standing at Rs 9,943 crore as on March 31, 2023. As on March 31, 2023, the bank reported a CET-1 of 11.05% and an overall CAR of 15.38%. During the fiscal, with the bank raising incremental equity to the tune of Rs 368 crore (inclusive of Rs 275 crore raised via employee stuck purchase scheme) , shareholding of the government of J&K and government of Ladakh, cumulatively, decreased marginally from 70% as on Mar-22 to the current 63%. Government of Ladakh has been allotted 4% shareholding in the bank during the past fiscal.

Nevertheless, continued support from the government of J&K and government of Ladakh, towards the bank as it is the primary lender for the UT of J&K and Ladakh, shall continue to exist. Consequently, in addition to the government of J&K which will retain majority stake in the bank over the foreseeable future, the involvement of the central government and expectation of potential support from it, has also increased after change in the political status of J&K.

Healthy resource profile

J&K Bank's resource profile remains healthy evidenced by its stable retail deposit base and leadership position in the union

territory of J&K which allows it to hold over 65% of the territory's deposit market. On March 31, 2023, the bank’s overall deposits stood at Rs 122,038 crore, which marks an annual growth of 6%. On the total deposit base, 87% were housed in

the union territory of J&K and Ladakh. The share of low-cost current and savings account (CASA) deposits in total deposits

has remained above 50% for six fiscals now, and stood at 54.1% on March 31, 2023, which is significantly higher than industry average. The bank’s cost of deposits reduced to 3.57% in fiscal 2023 from 3.65% in fiscal 2022. The bank’s deposit franchise is expected to remain healthy and benefit from its strong foothold in the deposit market of the territory.

Weaknesses:

Vulnerable, though improving, asset quality

Asset quality for the bank, while improving from previous fiscal, remains modest with GNPAs of 6.0% as on March 31, 2023, as compared to 8.7%, a year ago with most of legacy stress in portfolio being already provided for. The improvement was primarily driven by substantially higher recoveries and account upgradations during the fiscal primarily from infrastructure and manufacturing sector. However, CRISIL Ratings notes that the slippages for the bank elevated to 9.9% in fiscal 2023. CRISIL Ratings understands that a fair amount of slippages in fiscal 2023 was on account of technical issues as the bank upgraded their internal systems which were subsequently recovered. Consequently, the recovery to slippage ratio stood at 104% for fiscal 2023. For the remaining slippages, they primarily stemmed from loans to manufacturing industry in the J&K geography.

As on March 31, 2023, the provisioning coverage ratio (PCR; excluding technical provisions) maintained by the bank was 74% as compared to 71%, a year ago. Consequently, net NPAs remained comfortable at 1.62%. In terms of segmental GNPAs, the bank’s corporate portfolio has exhibited high slippages in the past and despite marginal improvement, had an elevated GNPA of 11.5% on March 31, 2023. Over the last few years, the bank has provided for the stressed accounts in this book and has also been cautious in account selection. However, most of the large NPAs are NCLT accounts which would get resolved slowly.

With the improvement in the economic environment in the UT, the bank has seen an improvement in its SMA I & II accounts as well. Further, a lot of the stress accounts earlier pertained to hotels and restaurants in the region which have rebounded, and in some cases have prepaid to the extent of 1 year of advanced payments.

Though stabilising alongside improving macro factors, the bank’s portfolio remains highly susceptible to socio-political developments in the union territory given the high regional concentration in operations. CRISIL Ratings believes that the bank's asset quality shall stabilize gradually as most of the legacy stress is already covered though, vulnerability to socio-political sensitivities in the region remains.

Modest, albeit improving, earnings profile

Profitability, through showing early signs of revival, remains relatively modest. With higher NPA recoveries during the fiscal, the credit costs have also been reducing. For fiscal 2022 and 2023, the bank’s overall credit costs were 0.3% and 0.1%, respectively – lower than credit costs of 2-4% incurred prior to Covid pandemic. Net Interest Margins (NIMs) have been in the range of 3.5-3.9% over the years and other income, between 0.5 – 0.6%. RoMA for fiscal 2022 and 2023 was 0.4% and 0.9% respectively following the improvement in above metrics. Historically, the bank’s stable operating profitability has partly offset the impact of high credit costs. Over the medium term, the bank is expected to sustain its pre-provisioning profitability at current levels. However overall earnings will remain susceptible to asset quality and provisioning requirements thereof.

Small scale of operations with high geographic concentration

In the overall banking space, J & K Bank remains a small sized bank with a market share of less than 1%. Total advances and deposits on March 31, 2023, stood at Rs 82,285 crore and 122,038 crore, respectively. Of the total advances - 73%, and of the total deposits - 87%, were housed in the territory of J & K and Ladakh, which indicates a very high level of regional concentration in the bank's operations. As the bank remains cautious of expanding operations outside of J&K due to its adverse asset quality experience in the past, its operations are expected to remain focused on the union territory of J&K and Ladakh. Nevertheless, the bank plans to reduce its concentration risk to the UT of J&K by expanding its retail portfolio in the rest-of-India geography, with incremental branches planned for expansion in the near term.