JM Financial - Stress pool has peaked; earnings buoyed by distressed credit resolutions - ICICI Securities

JM Financial (JMF) reported its Q3FY21 PAT at Rs1.81bn, up 15% YoY and ~30% QoQ. Earnings across IWS and mortgage lending businesses were stable (despite provisioning). Overall earnings were buoyed by distressed credit resolutions. ARC contributed Rs210mn to profits compared to
- Proforma GNPAs + SMA-2 + restructuring at 8.6%; 18-20% of loan portfolio to seek DCCO extension: Proforma NPAs were 3.57% (2.13% in Q2FY21) and SMA-2 pool has risen to 6.2% from 2.86% (overlap with proforma GNPL of 1.8%; adjusted SMA-2 at 4.4%). As was guided, the company offered resolution plan (restructuring) aggregating to Rs620mn (0.59% of loans); however, 18-22% of overall lending book would seek DCCO extension. JM has made additional provisions of Rs620mn (guided Rs500mn-550mn), thereby taking the total provisions to Rs3bn - covered to the extent of 5.1% on stress pool of 8.6%. Management has highlighted that NPA and SMA2 numbers have peaked and provisions are adequate for now with no further Covid-related cover anticipated. In NPL accounts, 'loss given default' (LGD) is expected to be Rs300mn-400mn against the provisioning of Rs1.23bn. In SMA-2 accounts, LGD is anticipated at Rs350mn-400mn against provisioning of Rs770mn. Balance portfolio is witnessing strong sales and collections, which is expected to continue in the coming quarters.

- Wholesale mortgages - JMF has started evaluating fresh proposals to build pipeline: Gross loans declined 9% QoQ to Rs104bn primarily as the wholesale mortgage book contracted from Rs84bn to Rs76bn (due to run-down of RMZ exposure post their deal with Brookfield). Sales data for the real estate sector over the last few months has been encouraging and the company expects escrow cashflows to remain strong. It has started evaluating fresh proposals to build a pipeline for gradually increasing the long-term loanbook. Retail mortgages were flat QoQ at Rs8bn and collection efficiency in home loans is at 98%, post moratorium.

- IWS business earnings were flat, driven by fee-cum-fund based income: Revenues (net of interest expense) in IWS businesses were up 4% QoQ/YoY and earnings were flat at Rs910mn. The segment has a robust pipeline of investment banking transactions. However, its average daily turnover declined 10% QoQ and consequently resulted in loss of cash market share to 1.45% (from 1.62% in Q2FY21). AUA (excluding custody assets) of private wealth management business was up 5% QoQ / 20% YoY at Rs567bn. Equity AUA for private wealth management business is sustaining its growth momentum and elite wealth management / institutional fixed income businesses are scaling up. Internal synergies amongst the various businesses are yielding strong results. JMF funded seven public issues (including one NCD issue) aggregating to a funding of Rs252bn.

- Distress credit resolutions buoy earnings: Distressed credit business, as was indicated, witnessed a few resolutions, adding to the overall profitability of the group. During the quarter, JMF closed two deals as part of debt aggregation of one large account. Higher focus on recoveries yielded results and recoveries during quarter were much higher at Rs7.5bn (Rs1.2 bn in Q2FY21). Focus continues to be on recoveries and resolution with a cautious approach towards acquisitions.

- JMF is strategically evaluating synergistic inorganic opportunities, particularly in retail lending or broking. In retail lending, it will look at entities in housing or small-ticket LAP that will help it double the segmental portfolio.

- Company has reduced leverage across segments and debt to equity now stands at 1.1x. Cash and cash equivalents at Rs37bn are higher than total short-term borrowings. It has resorted to CP borrowings whose proportion now stands at 9.2% of the total borrowing (vs 7.5% in Q2FY21).

Shares of JM FINANCIAL LTD. was last trading in BSE at Rs.80.75 as compared to the previous close of Rs. 83.05. The total number of shares traded during the day was 48721 in over 647 trades.

The stock hit an intraday high of Rs. 84.3 and intraday low of 80.15. The net turnover during the day was Rs. 4013057.

Source : Equity Bulls

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