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| With stable outlook, robust growth JK Bank rated 'AA' by FR | | |
New Delhi, August 05 - Fitch Ratings has affirmed Jammu and Kashmir Bank's ratings at national long term 'AA(Ind)' with stable outlook, robust growth, international individual 'D' and support '4'. At the same time, the agency also affirmed the bank's Rs 3bn subordinated debt issues at national long-term 'AA(ind)'.
Fitch Ratings is one of the three large global credit rating agencies. Fitch rates 5600 banks/financial institutions, including some 2500 insurance companies, more than 1300 major corporate houses and 99 sovereigns as well as public finance, sub-sovereigns and structured finance transactions.
The ratings reflect JKB's robust growth tier 1 capital ratio compared to other Indian banks, state government ownership, systemic importance to the state of Jammu and Kashmir (J&K) and its recent strategic shift to micro-lending in J&K.
As J&K presented limited growth opportunities in the 1990s due to militant insurgency, JKB had pursued a bulk deposit-funded wholesale lending strategy outside the state, in addition to holding a proportionately large investment book - aggregate credit-to-deposit ratio between FY03 and FY05 was 50% (system median was 58% for FY05). With lower margins in corporate loans and higher marked-to-market losses depressing its profitability (return on assets or RoA was 0.7% in FY06), the bank embarked on a new strategy focusing on the under-banked state of J&K and niche lending through sectoral verticals (like leather and caster oil) outside the state, while reducing the interest-rate sensitivity of its investment book. As the bank with the largest presence in J&K, this strategy also aims to benefit from the likely multiplier effect of the Government of India's ongoing five-year economic revitalization package of Rs 240 bn for the State.
JKB reduced the proportion of its low-margin assets and bulk deposits in its portfolio, leading to lower portfolio growth in FY07 ( 17.9%) compared to FY06. Profitability improved marginally in FY07 (RoA was 1 %) due to increased share of higher-margin businesses and lesser impact of rising borrowing costs due to lower growth.
Fitch notes the Bank's weak fee income stream (4.3% of operating income in FY07) is expected to benefit from higher fee potential in its target retail segment. JKB has also reduced the duration of its available-for-sale investment book to less than a year, which will reduce its vulnerability to adverse interest rate movements.
The bank would need, and has plans for further capital infusions over the next 12 months to fund growth.
Established in 1938, JKB is owned by the state government of J&K (around 53%). It has a large market position in J&K (more than 80% market share in liabilities) and is banker to the state government.
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