JS Bank Financial Performance, CAR concerns alleviated, but deposit mix still worrisome

JS Bank Financial Performance

JS Bank Limited (JSBL) financial performance positively surprised in the last quarter by posting earnings of PKR 0.74/share to bring the full year earnings to PKR 1.60 per share on a diluted basis (net income PKR 2.0bn). Chief reason for the sudden surge in earnings for the last quarter was booking of unusually high gains on sale of securities, mostly on the back of PIBs. As such high gains are unlikely to be repeated, we expect earnings to dip in 2017 compared to 2016. We also expect NIM to remain depressed at a low level of 2.4-2.5% throughout 2017. NIM had fallen to a low level of 2.6% in 4QCY16 on the back of a worsening deposit mix as the Bank remains focused on capturing market share without regard to cost of funds. On a positive note, the Bank has successfully taken its CAR to a comfortable level by issuing a TFC worth PKR 3bn. Following the posting of its full year financial statements, we have updated our target price for the stock to PKR 13.2/share from PKR 13.6 previously. As the stock provides an upside of 29% to its last closing price, we are maintaining a Positive stance on it.
JSBL issues PKR 3bn TFC for lifting CAR
JSBL financial performance has been able to improve its Capital Adequacy Ratio (CAR) to 14.05% by December 2016, from 12.5% at the end of December 2015, thanks to the issue of a new TFC worth PKR 3bn. The reported CAR of 14.05% provides a comfortable cushion from the regulatory requirement of 10.65% for December 2016. The 2016 CAR has eased concerns for the future too as it is comfortably above the required CAR of 12.5% to be achieved by December 2019. It has also eased our concern, cited in our stock flag previously issued on JSBL, that the sponsors of the Bank might want it to go for another high costing preference share issue.

 

JS Bank Financial Performance, CAR concerns alleviated, but deposit mix still worrisome
Gains on sale of securities unusually high in 4QCY16, expected to revert to normal level
The chief reason why JSBL beat our expectations was that it posted higher than expected gain on sale of securities in the last quarter, of around 1.6bn. A majority of the gains have come from sale of PIBs. We expect JSBL’s financial performance to be lower in 2017 compared to 2016 because we expect gains on sale of securities to normalize this year.

 

Unfavourable deposit mix pushes NIM down to 2.6% in the last quarter
JSBL appears to continue on its trend to aggressively increase deposits with a disregard for cost, with the result that the proportion of its Fixed Deposits in Total Deposits rose by 2.91ppts in the last quarter. Consequently, its cost of fund has not fallen by the same magnitude as its yields on earnings assets have come off. The chart below shows how JSBL’s deposit mix has continued to worsen in 2016.
We expect no change in the deposit mix in the future, unlike other banks, for which we expect the proportion of Current Deposits to increase.

 

Updating target price to PKR 13.2/share
We have updated our December 2017 target price for JSBL to PKR 13.2/share from PKR 13.6/share previously. Our TP has been derived by the Justified Price to Book Value method and is based on Justified P/B multiple of 1.0x (sustainable ROE of 16.2%, growth rate of 6%, required return of 16.2%) and December 2017 diluted BVPS of PKR 13.2/share. As our TP implies an upside of 29% to JSBL’s last closing price, we are adopting a Positive stance on the stock. Please note that our target price is based on diluted number of shares.
Please also note that we do not actively cover JSBL, and may or may not follow up this report with regular reports on earnings preview, review, valuation update, etc.

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