Detailed Rationale

CRISIL Ratings has reaffirmed its 'FAA-/Negative/CRISIL A1+' ratings on the fixed deposits and certificate of deposits of The Jammu and Kashmir Bank Limited (J&K Bank).

 

The ratings continue to factor in the systemic support that the J&K Bank is expected to receive from the government of J & K in case of distress, given the bank's importance in the union territories (UTs) of J&K and Ladakh, which is evidenced by its unchallenged market position in these territories and healthy resource profile.

 

The bank received Rs 500 crore as tier I capital from the government of J&K in March 2020 and is expected to receive another tranche of the same amount in fiscal 2022. This is reflective of the support that can be expected from the government of J&K towards the bank as it is the primary lender for the UTs of J&K and Ladakh. As a UT now, J&K falls under the purview of the central government. However, there is no announcement on any impending change in shareholding from the government of J&K to the Centre.

 

The bank’s liability has remained strong reflected in a higher share of retail deposits and very high proportion of Current and Savings Accounts (CASA). On March 31, 2021, J&K Bank’s CASA ratio stood at 56.8%.

 

These strengths are partially offset by the bank’s modest asset quality and earnings profile, and small scale of operations marked by high geographical concentration.

 

The continuation of 'Negative' outlook is driven by the sustained pressure on the bank's asset quality on account of high non-performing assets (NPAs) in the corporate book and the restructured portfolio relating to floods and unrest in the Kashmir Valley in 2016, 2019 that remains outstanding. This is despite some stabilisation seen in fiscal 2021. In addition, the vulnerability of the loan portfolio (especially micro, small and medium enterprises—MSMEs) to the socio political developments in the region also constrains the asset quality of the bank.

 

The disruption in business post reorganisation of the state was momentary and soon after the lockdown was lifted, the accounts which had slipped during fiscal 2020, recovered. Thereafter, with the outbreak of the pandemic, fiscal 2021 started on a muted note however, since the severity of Covid-19 and the lockdown imposed by the Centre was low in J&K, which houses almost 70% of the bank’s loan book, incremental slippages were on the lower side. The bank’s slippage rate was just 1.6% for fiscal 2021 as against 5.8% in fiscal 2020. On March 31, 2021, the bank’s gross NPAs (GNPAs) and net NPAs (NNPAs) stood at 9.7% and 3.0% as compared to 11.0% and 3.5%, respectively, a year ago. Provisioning coverage ratio stood at 71.7% (excluding technical provisions) as on closing date of fiscal 2021. The bank restructured a very small proportion of its loan book in fiscal 2021. However, its operating profile remained stable driven by reduced credit costs of sub 1%. The return on average managed assets (RoMA) was 0.4% for fiscal 2021 as compared to negative 1.1% for the previous fiscal. Net profit was Rs 432 crore for fiscal 2021 as against a loss of Rs 1139 crore for fiscal 2020.

 

Overall capital adequacy ratio (CAR) was 12.2% whereas CET I was 8.8% as on March 31, 2021. In June 2021, the bank’s board approved a plan to raise Rs 3500 crore of capital over the next few quarters, of which Rs 500 crore is expected to be infused by the government of J&K, Rs 150 crore as Employee Stock Purchase Scheme (ESPS) and balance, through other modes, which are yet to be finalised. This capital raising plan has been formulated with the objective of augmenting growth plans and, maintaining adequate buffer amidst the pandemic challenges.

Analytical Approach

CRISIL Ratings has assessed the standalone credit risk profile of J&K Bank and subsequently, notched it up for the support that the bank has received, and is expected to continue receiving, from the government of J&K on a steady state basis. Being the largest bank in the territory, J&K Bank remains systemically important to the economy of the region. The government of J&K currently holds over 68% stake.

Key Rating Drivers & Detailed Description

Strengths:

* Systemic support from the J&K government due to the bank’s dominant position in the region

While J&K Bank is relatively small in terms of size when compared to peers, it is the largest bank in the UT of J & K. Given its systemic importance to the territory’s economy, the government of J&K will continue to extend need-based support. The bank received Rs 500 crore as capital from the government in March 2020 – this was for sustaining adequate buffer in capitalisation after absorbing the impact of elevated slippages in the aftermath of Article 370 abrogation. In fiscal 2022, the government of J&K is expected to infuse another tranche of Rs 500 crore as capital.

 

As a UT now, J&K falls under the purview of the Central government however, there has been no official statement from any of the parties involved or associated with this arrangement, regarding any change in shareholding of the bank.

 

* Healthy resource profile

J&K Bank's resource profile remains healthy evidenced by its stable retail deposit base and leadership position in J&K which allows it to hold over 65% of the territory's deposit market. On March 31, 2021, the bank’s overall deposits stood at Rs 108,061 crore, which marks an annual growth of 11.0%. On the total deposit base, 88% were housed in the UTs of J&K and Ladakh. The share of low-cost CASA deposits in total deposits has remained above 50% for five fiscals now and stood at 56.8% as on March 31, 2021, which is significantly higher than the industry average of about 30%. The bank’s cost of deposits reduced to 4.1% in fiscal 2021 from 5.0% in fiscal 2020.

 

The bank’s deposit franchise is expected to remain healthy and benefit from its strong foothold in the deposit market of the territory.

 

Weakness:

* Modest asset quality

The asset quality for the bank, though stabilised in fiscal 2021, remained modest with GNPAs of 9.7% as on March 31, 2021 as compared to 11.0%, a year earlier. The decline was driven by reduction in slippages. As compared to a slippage rate of 5.8% for fiscal 2020 and 4.9% for fiscal 2019, slippages for fiscal 2021 were lower at 1.6%. Last year’s increase in slippages was from the J&K portfolio, which was impacted after the abrogation of Article 370 and imposition of lockdown in the territory thereafter. However, post resumption of business in November 2019, most of the accounts revived – resulting in thrice as many up-gradations during fiscal 2020 as for any other year. Just when things had started to restore, another setback came in the form of the lockdown imposed to curb Covid-19, which happened at the very onset of business season of J&K. However, since the severity of the pandemic in J&K was low, revival in business activity after the lockdown was lifted was faster than expectation. On March 31, 2021, the bank’s restructured portfolio stood at Rs 2,223 crore – of which Rs 619 crore was standard and balance, NPA. This also includes the portfolio restructured in 2014 and 2016 pertaining to floods and unrest in J&K and majority of it is NPA. During fiscal 2021, the bank restructured Rs 259 crore under the Reserve Bank of India’s restructuring scheme of 2021 and may offer restructuring in the current fiscal as well if borrowers demand.  As on March 31, 2021, the provisioning coverage ratio (PCR; excluding technical provisions) maintained by the bank was about 70%.

 

In terms of segmental GNPAs, the bank’s corporate portfolio has exhibited high slippages in the past and stood at 20% as on March 31, 2021. While the bank has been making attempts to reduce its corporate exposure and build a granular portfolio, its performance in this legacy book remains a constraint. Further, given the high concentration of the bank in the territory of J&K, the portfolio remains highly susceptible to socio-political developments in the region. CRISIL Ratings believes that the bank's asset quality will remain under pressure over the medium term on account of legacy issues in its corporate portfolio and restructured book and, vulnerability to socio-political sensitivities in the region. Additionally, the impact of the second wave of Covid-19 on the bank’s business growth and asset quality, remains a key monitorable.

 

* Below-average earnings profile

For the last two-three fiscals, the bank’s profitability had remained subdued accredited to increased provisioning requirement and interest reversals for slippages to NPAs. Apart from these, the bank also made provisions for all the accounts of IL&FS Financial Service Ltd (Rs 884 crore) to the extent of 100%. Resultantly, its credit costs for fiscal 2020 rose to 2.5% from 1.1% for the preceding year, leading to a loss of Rs 1139 crore for the year. However, with reduced net slippages during fiscal 2021, the bank’s credit costs have also corrected to 0.9%, resulting in a net profit of Rs 432 crore for fiscal 2021. RoMA for the year was 0.4% as compared to negative 1.1% for fiscal 2019. Historically, the bank’s stable operating profitability has partly offset the impact of high credit costs. Net Interest Margins (NIMs) have been at 3.5-3.9% over the years and other income at 0.5 – 1.0%.

 

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. The impact of the second wave of Covid-19 on the bank’s earnings profile, if any, will be a key monitorable.

 

* 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, 2021 stood at Rs 66,842 crore and 108,061 crore, respectively. Of the total advances - 69%, and of the total deposits - 88%, 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, operations are expected to remain focused on the UTs of J&K and Ladakh.

Liquidity: Strong

The bank's liquidity position is comfortable, supported by a strong retail deposit base that forms a significant part of the total deposits. On March 31, 2021, the bank’s liquidity coverage ratio (LCR) was 337.08% and its excess statutory liquidity ratio (SLR) 14.61%. The bank's liquidity also benefits from access to systemic sources of funds such as the liquidity adjustment facility from the RBI, access to the call money market, and refinance limits from development institutions.

Outlook: Negative

J&K Bank's asset quality remains modest on account of high NPAs within the corporate portfolio, legacy restructured portfolio and sensitivity of the MSME segment to socio-political developments in J&K. Further, asset quality may remain under pressure over the near term amidst prevailing pandemic challenges.  Consequently, the bank's profitability is expected to remain contingent to potential credit losses.

Rating Sensitivity Factors

Upward Factors

• Improvement in GNPA ratio to below 8%
• Sustainability in earnings profile demonstrated by continued internal accrual to networth
• Significant regional diversification in operations

 

Downward Factors

• Material and prolonged weakening in asset quality reflected in GNPAs rising to and remaining at 12%, leading to moderation in earnings profile
• Significant and sharp reduction in cushion in CAR over regulatory stipulation

About the Bank

J&K Bank, headquartered in Srinagar, was established in 1938. The J&K government owns 68.18% in the bank, which has increased from 59.23% previously after the government infused capital into the bank in March 2020.

Any other information: Not applicable