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Exits FY21 with well contained stress pool; sequential AUM uptick encouraging

JM Financial (JMF) reported Q4FY21 PAT of Rs1.77bn, up 35% YoY. What encouraged: 1) GNPAs (at 3.5%) settled near Q3FY21 proforma levels and SMA-2 pool sharply shrunk QoQ from 4.4% to 2.94%; 2) Company exited FY21 with 2.5% credit cost – mere Rs395mn provisioning in Q4FY21; 3) Mortgage lending AUM witnessed sequential uptick; home loan scale-up continued; 4) Investment banking pipeline, cash equity market share retracement and wealth AUA ramp-up bodes well for IWS business.

Key monitorables: 1) 19.7% of loan portfolio has sought DCCO extension; and 2) timely resolution of stressed assets key to drive ARC RoE from 4% in FY21. High capitalisation, calibrated growth approach with low risk tolerance and superior RoA will help JMF navigate the current challenging phase relatively well. Maintain BUY with target price of Rs117.

* GNPAs + SMA-2 down QoQ to 6.5% (from 8%); company exited FY21 with 2.5% credit cost:

GNPAs settled near Q3FY21 proforma levels at 3.5% and SMA-2 pool (ex-proforma) was down sharply QoQ from 4.4% to 2.94%. A couple of Mumbai developers with exposure of Rs800mn moved out of GNPAs which, in absolute terms reduced from Rs5.3bn to Rs4.7bn. Only three developer accounts now continue in SMA-2 compared to seven earlier. This was possible due to healthy collection trajectory – escrow collections were at 120% in March, and even in April it continued at 118%. Under-construction projects as well as LAP are witnessing healthy collections.

With improvement in asset quality, JMF created much lower provisions at Rs395mn at the consolidated level (Rs370mn towards mortgage lending); of this, Rs230mn was additional buffer. It now carries provision of Rs3.8bn (vs Rs3.6bn in Q3FY21). However, management is reasonably certain that NPA and SMA2 numbers peaked in Dec’20 and existing provisions are adequate for now. Management expects some delays in under-construction projects, and the company is monitoring the environment closely.

* Restructured <1% of AUM though 19.7% of portfolio is under DCCO extension:

As was guided, the company offered resolution plan (restructuring) to less than 1% of advances; however, DCCO extension was sought for 19.7% of the overall lending book. Entire DCCO book was towards real estate projects in mid to final stages of construction and there are hardly any projects in the nascent stage. 75% of the DCCO portfolio has witnessed healthy sales and recoveries. None of the DCCO projects are in SMA or NPA. Further increase in DCCO is unlikely despite covid; however, we will watch the situation closely.

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