Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the certificate of deposits and short-term fixed deposits of The Jammu and Kashmir Bank Limited (J&K Bank) at ‘CRISIL A1+’. CRISIL Ratings has also migrated its rating on the fixed deposit programme of the bank to ‘CRISIL AA-’ from ‘FAA-’ and, has revised the outlook on the same to ‘Stable’ from ‘Negative’.

 

The rating migration follows the revision in the rating scale for FD programmes, which is now aligned with the Securities and Exchange Board of India (SEBI)- standardised 20-point, long-term scale. Previously, CRISIL Ratings used a 14-point scale for assigning ratings to FD programmes. This alignment is in compliance with the regulatory guidelines as per the circular issued by SEBI on July 16, 2021, and the subsequent SEBI circular dated April 1, 2022, for standardising the rating scales used by credit rating agencies.

 

This migration represents only a recalibration of the rating from one scale to another and does not reflect any change in the credit risk profile of the fixed deposit programme. It is neither an upgrade nor a downgrade of the underlying credit risk profile of the FD programme.  (Please refer to CRISIL’s criteria for rating fixed deposit programmes for further details).

 

The revision in outlook is driven by the improvement in the bank’s asset quality metrics with most of legacy stress in portfolio being already provided for and, the consequent improvement in the overall earnings profile, while the bank’s deposit franchise and position in the union territory (UT) of Jammu and Kashmir (J&K) remaining strong. The overall ratings continue to factor in the systemic support that the bank derives from the government of J&K given its importance to the financial ecosystem in J&K, strong position in the union territory, its healthy resource profile and improved capitalisation. These ratings, however, are partially offset by the vulnerable, though stabilising, asset quality, its small market share in the overall banking system in India with regional concentration in operations and modest earnings profile.

 

The bank’s asset quality has gradually improved over the last 2-3 years despite macro challenges like the socio-political unrest in J&K in the immediate aftermath of abrogation of Article 370 and outbreak of the pandemic. Asset quality metrics were impacted post these events with GNPA inching up to 11.0% as on March 31, 2020 from 8.97% as on March 31, 2019. However, in fiscal 2022, with the rebound in economic activity for the UT and increasing tourism, the GNPA for the bank, albeit still elevated, improved to 8.7% as on March 31, 2022. Net NPA also improved to 2.5% as compared to 3.0% as on respective dates, owing to a comfortable provisioning coverage ratio (PCR) of over 70% on both dates.

 

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. This gives way to the expectation of curtailed incremental slippages which should support asset quality metrics going forward.

 

The bank’s capital position has also strengthened in the last two fiscals supported by Rs 2000 crore of capital raised over this period and, is expected to benefit further from the bank’s plan to raise another Rs 1500-1800 crore majority of which is expected from public sector entities in fiscal 2023. As on March 31, 2022, the bank reported a CET 1 of 10.4% and an overall CAR of 13.2%. The government of J&K has infused capital in the last two fiscals and retains majority stake in the bank. 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 UT of J&K and Ladakh. 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.

 

With the new management taking over the bank and State Bank of India (SBI, rated ‘CRISIL AAA/CRISIL AA+/Stable’) taking a minority stake, some of the systems and processes in the bank are being aligned with what is existing at SBI. This along with tie ups with larger public sector banks, including SBI, for training of employees will bode well for the bank going forward.

 

The bank’s overall profitability remains supported by healthy NIMs of 3.5-3.9%. Additionally, benefitting from reduced credit costs of ~1% for fiscal 2021 and 2022 – the bank reported an improved RoMA of 0.4% for fiscal 2022 as compared to 0.3% for the previous year.

Analytical Approach

For arriving at the ratings, 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 territory. The government of J&K currently holds over 68% stake in the bank and has demonstrated track record of extending timely financial support to the bank which is expected to continue in long run

Key Rating Drivers & Detailed Description

Strengths:

• Systemic support from J&K government 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 Article 370 abrogation. 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 60% stake in the bank in the medium term. In fiscal 2023, the bank is expected to raise another round of Rs 1500-1800 crore as capital and public sector units like SBI and LIC are also expected to participate in this. This evidences the increased involvement of the Central government, and potential support expected from it, towards the bank.

 

•  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, 2022, the bank’s overall deposits stood at Rs 114,710 crore, which marks an annual growth of 6%. On the total deposit base, 88% 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 56.6% on March 31, 2022 which is significantly higher than industry average. The bank’s cost of deposits reduced to 3.65% in fiscal 2022 from 4.10% in fiscal 2021.

 

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 stabilising, asset quality

Asset quality for the bank, though stabilized since fiscal 2021, remains modest with GNPAs of 8.7% on March 31, 2022 as compared to 9.7%, a year ago. The decline was driven by reduction in slippages over the last two fiscals though 2022 and a corresponding increase in reductions. As compared to a slippage rate of 5.8% for fiscal 2020 and 4.9% for fiscal 2019, slippages for fiscal 2021 and 2022 were lower at 1.6% and 4.1%, respectively.

 

In the immediate aftermath of Article 370 abrogation and the lockdown which followed, slippages had elevated momentarily. 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.

 

Subsequently, following the covid-19 outbreak – there was a short period of muted business however, since the severity of the pandemic in the territory of J&K was low, revival in business activity after the lockdown was lifted was faster than expectation. On March 31, 2022, the bank had a restructured portfolio of Rs 3,210 crore – of which Rs 1,552 crore was standard and balance, NPA. This also includes the portfolio restructured after the floods of 2014 and unrest of 2016, and the restructuring done as part of the RBI scheme after the pandemic. As on March 31, 2022, the provisioning coverage ratio (PCR; excluding technical provisions) maintained by the bank was 71% as compared to 68%, a year ago. 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 24.2% on March 31, 2022. 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.

 

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 earnings profile

Profitability, through showing early signs of revival, remains relatively modest. With reduced net slippages, the credit costs have also been reducing. For fiscal 2021 and 2022, the bank’s overall credit costs were 0.9% and 0.3%, respectively – lower than credit costs of 2-4% incurred prior to that. Net Interest Margins (NIMs) have been in the range of 3.5-3.9% over the years and other income, between 0.5 – 1.0%.  RoMA for fiscal 2021 and 2022 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. 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, 2022 stood at Rs 70,401 crore and 114710 crore, respectively. Of the total advances - 73%, 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, its operations are expected to remain focused on the union territory of J&K and Ladakh.

Liquidity: Strong

The bank's liquidity position is comfortable, supported by a strong retail deposit base that forms significant part of the total deposits. On March 31, 2022, the bank’s liquidity coverage ratio (LCR) was at 209.16% and its excess statutory liquidity ratio (SLR) was 14.1%. 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: Stable

J&K Bank is expected to continue receiving systemic support from the government of J&K in lieu of its strong market position in the union territory of Jammu & Kashmir and Ladakh. The bank’s liability franchise shall remain strong and its capitalisation, adequate. Asset quality and profitability, though stabilising, remain modest and susceptible to socio-political developments in the territory of J&K would remain.

Rating Sensitivity factors

Upward Factors

• Sustained improvement in GNPA ratio of the bank to below 6%
• Significant improvement in earnings profile demonstrated by sustained improvement in RoMA
• Material increase in geographical diversity of operations.

 

Downward Factors

• Material and prolonged weakening in asset quality reflected in GNPAs rising to and remaining at 9%, leading to moderation in earnings profile
• Significant and sharp reduction in cushion in capital adequacy ratios over regulatory stipulation

About the Company

J&K Bank, headquartered in Srinagar, was established in 1938. The J&K government owns 70% in the bank, which has increased from its previous shareholding of 59.23% after the government infused capital into the bank over the last 2 fiscals.

Key Financial Indicators

As on/For six months ended	Unit	March 31, 2022	March 31, 2021	March 31, 2020
Total assets	Rs crore	130602	120292	108872
Total income (net of interest expenses)	Rs crore	4692	4490	4253
Profit after tax	Rs crore	502	432	-1139
Gross NPA	%	8.7	9.7	11.0
Overall capital adequacy ratio	%	13.2	12.2	11.4
Return on assets (annualized)	%	0.4	0.4	-1.1

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity Level	Rating assigned  with Outlook
NA	Certificates of Deposits	NA	NA	7-365 days	0	Simple	CRISIL A1+
NA	Short-Term Fixed Deposits	NA	NA	7-365 days	0	Simple	CRISIL A1+
NA	Fixed Deposits	NA	NA	NA	0	Simple	CRISIL AA-/Stable