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.
- Wholesale mortgages witnessed sequential uptick; growth looking up for FY22E: Management last quarter indicated that it is cautiously evaluating opportunities across geographies and will look at gradually increasing the lending book. Gross loans improved 4% QoQ to Rs109bn; of this, mortgage lending was up 4% QoQ to Rs76.5bn. Within mortgage lending, the company is more focused on construction financing compared to structured financing or land financing.
Interestingly, JMF has stepped up its borrowing programme since January for growth. Management expects some disruption due to covid second wave (sales momentum is likely to get hampered) and remains cautious given the uncertainty. Consequently, the target for growth in wholesale mortgages can be 10-12% lower than earlier envisaged, but still comfortable in growing the portfolio by >15%.
- Equity infused in home financing business to drive retail growth: Besides wholesale mortgages, home loan AUM grew 20% QoQ to Rs4.3bn with focus on affordable housing. Collection efficiency is holding up well at 99%. It is looking to cross the milestone of Rs10bn of retail AUM in FY22. JM Credit Solutions has infused Rs4.9bn of capital into the home finance business for growth.
- IWS - Complementary ecosystem aiding growth: Investment banking, wealth and securities businesses did well QoQ - revenues (net of interest expense) of IWS business were up 6% QoQ and earnings 13% QoQ to Rs1.04bn. Average daily turnover regained traction and cash market share was back to 1.6%. JM maintains its brand equity and share in research-led trading, block trading and margin trading. AUA of wealth management business stood at Rs590bn (excluding custody assets) - up 4% QoQ / 24% YoY. Wealth management and investment banking businesses collaborate for servicing the prime ultra HNI segment. Looking at turning around the mutual fund business by strengthening the leadership team, JM AMC has hired a CEO, who is expected to come on board by May-end.
- Timely resolution key to drive ARC RoEs up: Higher focus on recoveries yielded results and recoveries during the quarter were about Rs2.4bn while security receipts (SRs) of Rs1.4bn were redeemed. The ARC acquired loans of two companies during the quarter. Outstanding security receipts stood at Rs111bn as of FY21 vs Rs109bn in Q3FY21. The contribution of ARC towards the SRs stood at Rs32bn. It achieved total recovery of Rs11.9bn in FY21 through the CIRP process. For full year FY21, due to delayed resolution, RoE was capped at mere 4%. However, encouragingly, there was not much provisioning needed on the stressed pool; in fact, there was write-back in Q4FY21 as well as full year FY21.
- 'Interest on interest' reversal was at Rs180mn, of which Rs160mn was not booked while Rs20mn was reversed in March.
Shares of JM FINANCIAL LTD. was last trading in BSE at Rs.82.7 as compared to the previous close of Rs. 80.5. The total number of shares traded during the day was 209166 in over 1762 trades.
The stock hit an intraday high of Rs. 84.85 and intraday low of 80.65. The net turnover during the day was Rs. 17255419.