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Much awaited loan growth kicks in; gained earnings traction in non-lending businesses also key to rerating

JM Financial’s (JMF) Q2FY23 result was characterised by: 1) Much-awaited loan growth finally materialising with 16% QoQ / 32% YoY expansion. 2) Retail mortgage disbursements up 21% QoQ / 67% YoY; AUM doubles YoY; network rises to 75 branches. 3) Stress pool declines QoQ to 5.2% (GNPA + SMA-2) vs 5.7%. 4) Investment banking – broadly stable revenues supported by fixed-income activities. 5) Platform AWS – revenue up 25% QoQ; investments in franchise continues; equity AUM up 8% QoQ. 6) Alternative and distressed credit – muted quarter as recoveries were limited. All in all, consolidated PAT settled at a better than expected level of Rs1.8bn (up 6% QoQ / 3% YoY), translating to a consolidated RoA of 4.4% and RoE of 11.8%.

With Q2FY23 performance exceeding our expectations, the company is closely moving towards its guidance: 1) Doubling the mortgage lending portfolio to Rs150bn by FY24 ((Rs120bn (Rs73bn in Q2FY23) of wholesale mortgages and Rs30bn (Rs14bn in Q2FY23) of retail mortgages)) with targeted RoEs of 15%. 2) Contain net NPA + SMA-2 at less than 5% (3.7% already achieved in Q2FY23). 3) Drive investment bank business RoEs towards high-teens (16.4% in H1FY23). 4) Target RoEs of 25% (vs 2.3% in H1FY23) in Platform AWS business (focused on retail clients) by leveraging technology/digital infrastructure. 5) Scale-up of mutual fund AUM to Rs250bn by FY25 (vs Rs30.3bn in Q2FY23). Maintain BUY with a revised SoTP target price of Rs119 (earlier: Rs122). Key risks: i) higher than anticipated stress flow from DCCO restructured pool; ii) deferral in resolution of ARC stressed assets; iii) modest earnings trajectory in Platform AWS due to continued investments.

* Much-awaited loan growth finally comes in with 16% QoQ / 32% YoY expansion: In line with its earlier guidance, the company gained significant traction in its lending verticals during the quarter. Loanbook grew to Rs146.7bn, up 16% QoQ and 32% YoY, primarily due to 22% QoQ growth in wholesale mortgage to Rs73.2bn. The increase in loanbook will reflect in H2FY23 and FY24 earnings. Incremental growth delta primarily flowed from Bangalore region (proportion was up to 24.1% from 17.5% QoQ). The wholesale mortgage lending focuses on metro cities, viz., MMR, Pune, Bangalore, Chennai, Hyderabad and NCR.

With rapid consolidation in the sector, top developers are garnering a high market share. Company is witnessing a strong pipeline of transactions and expects growth traction (particularly for construction financing and take-out lending) to improve in a benign competitive environment. Overall, the guidance of Rs120bn for wholesale book by FY24 remains intact. We are building-in consolidated loanbook growth of 20%/ 18% for FY23E / FY24E.

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