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Business priorities realigned towards driving scale and value

JM Financial’s business positioning has been realigned and business segments reclassified. Management has set business priorities towards 1) deepening and expanding the client base; 2) building business scale and creating value leveraging its franchise and market opportunities; and 3) investing in technology and digital medium. Q1FY22 PAT (cons) came in higher at Rs2.03bn (vs Rs5.1bn in FY21).

Key notable trends: 1) Recoveries in distressed credit gave incremental Rs1.3bn revenue delta (bulk of it from Kingfisher). 2) Wholesale mortgage portfolio has grown 5% QoQ; 3) built additional ECL buffer of Rs820mn (SMA-2 jumped QoQ to 6%) and markeddown SRs by Rs500mn due to delayed resolution, 4) NIMs too declined 40bps QoQ to 6.9%; and 5) employee cost was elevated (up 41% QoQ/78% YoY). With renewed focus on client-focused business structure and risk calibrated scale up of businesses, we revise SoTP based fair value to Rs131. Maintain BUY.

* Business reclassification and key business priorities aligned to building scale: JMF reclassified its business segments into: i) Investment Bank, ii) Mortgage Lending, iii) Alternative and distressed credit and iv) Asset Management, Wealth Management and Securities business (Platform AWS). The primary objective is to create a client-aligned business structure to enable deeper focus, faster growth and a seamless execution of its digital strategy.

* Key business priorities:

* Investment Bank will be cornerstone of its franchise catering to institutional, corporate, government and will provide institutional coverage to ultra HNI clients and entrepreneurs. It will expand the depth and breadth of this client base and expect to add digital companies as well. It will expand its syndication platform and deliver on franchise enhancing lending with consistent risk management.

* Mortgage Lending will be a combination of wholesale and retail: It will grow its wholesale loans post easing of travel conditions and strengthening underwriting framework. In this segment, key focus will be building scale in retail mortgage through technology driven sourcing, monitoring and client servicing.

* Alternative and Distressed Credit – With expertise built in this niche business, it will create value in certain portfolio companies. It will follow co-investment model with strategic partners/ financial investors including distressed funds and focus on annuity revenue streams.

* Platform AWS: This will be an integrated investment platform for individual clients. Focus is on being future and digital ready and drive new asset and client acquisition (access to next generation). It will pursue digital-led recruitment, on-board modern tools and enhance customer experience.

Notable trends in Q1FY22 earnings

* GNPAs flat; SMA-2 at 5% of consolidated book: GNPAs were flat QoQ at 3.46% (against our expectations of an increase). However, SMA-2 pool spiked to 5% (from 2.94%) due to second covid wave disruption. It created additional provisions of Rs1.3bn and now carries provision of Rs5.2bn on account of pandemic (50bps of consolidated book). Provision includes additional buffer for expected credit loss of Rs820mn (SMA-2 was up QoQ 3.5% to 6%) and markdown of SRs by Rs500mn due to delayed resolution.

Impact of lockdown faced in different geographies was of different measures. Collections seen from projects in Q1FY22 were still healthy; however, the footfalls in the projects saw a sharp decline and hence, impacted fresh sales in most projects. Management expects some delays in under-construction projects and the company is monitoring the environment closely. Also, key monitorable would be behaviour of 19.7% of loan portfolio that has sought DCCO extension.

* Mortgage Lending book grew 5%; cautiously evaluating growth opportunities: Management last quarter indicated it is cautiously evaluating opportunities across geographies and will look at gradually increasing the lending book. Gross loans were sequentially flat at Rs110bn (on expected lines). However, mortgage lending grew 5% QoQ to Rs7.6bn. General sentiment towards residential real estate remains positive and it is witnessing increased demand across ticket sizes.

Given the reduction of the inventory overhang across geographies and the rise in demand, developers are looking at acquiring new projects and will witness increase in new launches. It is cautiously evaluating opportunities across geographies and will look at gradually increasing the lending book. Target for growth in wholesale mortgages can be 10-12% lower than earlier envisaged, but still comfortable in growing the portfolio by >15%.

* Infrastructure network of retail mortgage lending is being built out rapidly: JMF added 10 branches taking the total tally to 40 branches. Retail mortgage lending book grew 4% QoQ. The focus here is on affordable housing and selfemployed segment. In the absence of third wave, it is looking to cross the milestone of Rs10bn of retail AUM within next 12 months.

* Investment bank – robust pipeline: Investment banking business reported more than 50% YoY growth and pipeline is robust. Average daily trading volume for institutional equities was Rs4.8bn.

* Platform AWS: AUA of private wealth management business was up 2% QoQ/27% YoY to Rs604bn (excluding custody assets). Retail wealth management witnessed 7% QoQ/21% YoY to Rs173bn and elite wealth management also seeing scale up (now AUM stands at Rs6.6bn). Average daily trading volume of retail stood at Rs115bn. Average MF AUM declined 10% QoQ to Rs21.4bn. Mr. Amitabh Mohanty has been newly appointed as the Managing Director and Chief Executive Officer of JM Financial Asset Management Limited.

* Alternative and distressed credit revenue buoyed by recovery: Higher focus on recoveries yielded results. Recoveries during the quarter were about Rs10.7bn (Rs2.4bn in Q4FY21) and security receipts of Rs2.26bn (Rs1.4bn) were redeemed. Outstanding Security Receipts thereby came down to Rs109bn (from Rs111bn as of FY21). This recovery gave incremental revenue delta of Rs1.3bn (we believe bulk of it would flow from Kingfisher). It acquired loans of two companies during the quarter. The contribution of JM ARC towards the SRs stood at Rs31.5bn. Timely resolution of stressed assets is key to drive ARC RoE from 4% in FY21.

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