Key Rating Drivers & Detailed Description
Strengths:
Healthy capitalisation
The group maintains healthy capitalisation, inherently providing cushion against the asset-side risk. Capitalisation is supported in the form of fresh equity as well as healthy accruals to networth.
Capitalisation metrics for JM Group remains healthy with networth (including minority interest) of around Rs 11,153 crores as on June 30, 2023 (Rs 10,972 crores as on March 31, 2023) with overall CAR at 35.8% (38.5% as on March 31, 2023). Over the past five fiscals, the peak gearing for the company was at 2.8 times in December 2017 and remained comfortable at 1.45 times as on June 30, 2023 (1.47 times as on March 31, 2023). The Net Debt to Equity as of June 30, 2023 on a consolidated basis stood at 1.34 times (1.25 times as on March 31, 2023). The capitalisation metrics have been supported by proactive capital raises with JM group raising equity of around Rs 1,379.4 crores in fiscal 2018-2019 and Rs 770 crores in June 2020.
Established market position across its businesses and diversified business model
The group has developed a strong franchise in key operating segments such as investment bank, platform AWS, alternative and distressed credit and mortgage lending. This is aided by the track record and reputation of its experienced management and healthy client relationship. Furthermore, management has been conservative in its risk philosophy. The group has strong network of borrowers with whom they have long relationship. Over the years the company has strengthened its risk department. Since 2018, the group has forayed into retail finance especially housing finance loans. While the share of the same to the overall portfolio remains small, the infrastructure has been scaled up and processes and systems have been put in place. As of June 30, 2023, the retail mortgage business has 93 branches. The group intends to focus on growing the retail mortgage portfolio which would provide granularity and further diversification to the AUM.
Diversified business model and comfortable earnings profile
The group had a loan book of Rs. 15,891 crores on a consolidated basis as on June 30, 2023, comprising wholesale mortgage (50%), retail mortgage (13%), bespoke (20%), Financial Institutions Financing (10%) and Capital markets lending (7%). The group forayed in retail lending in FY2017 through products like home loan, LAP and educational institutions lending.
The group's earnings remain comfortable, with total revenue of Rs 3,343 crores and a profit after tax (post Minority interest) of Rs 597 crores for the fiscal 2023 (Rs 3,763 crore and Rs 773 crore, respectively, for fiscal 2022). The decline in profits in fiscal 2023 is largely attributed to a one-time additional provisioning of Rs 246 crore done for certain large corporate security receipts; adjusting for the same, profits stood at Rs 705 crore. For first 3 months of fiscal 2024, the total revenue stood at Rs 1,081 crore with profit after tax (post Minority interest) of Rs 166 crore.
The group benefits from greater diversification of the business profile over the past few years and this has given stability to its earnings profile. The group has strengthened its investment bank segment primarily through fixed income capabilities and improving synergies and product capabilities. The investment bank, mortgage lending, alternative and distressed credit and Platform AWS business constituted around 38.9%, 39.4%, 4.1% and 16.8% respectively of total revenue for fiscal 2023. Profit after tax (PAT) contribution from these segments constituted 62.1%, 27.0%, -12.3% and 4.3% respectively, during the period. The earnings profile for JM Financial group has been comfortable with an average 5-year ROA of around 4.0% providing sufficient cushion in the earnings profile to withstand any increase in delinquencies. The group reported a ROA of around 2.7% for fiscal 2023 lower than 4.0% for fiscal 2022 owing to elevated provisioning driven in the distressed credit businesses of the group. For the 3 months of fiscal 2024, the annualized ROA was 2.4%. Any impact on the earnings profile in the event of slippages translating into elevated credit costs remains monitorable.
Weaknesses:
Asset quality in the wholesale lending business remains inherently vulnerable; albeit risk management processes are comfortable
At a sectoral level, what has supported the asset quality metrics of wholesale non-banks in the past, has been the ability of the entity to get timely repayments/exits via refinancing or event-linked fund inflows. Further, at a sectoral level, wholesale segment is vulnerable to slippages in asset quality. However, JM group has so far managed its portfolio prudently and faced limited slippages. The group maintains healthy capitalisation, which inherently provides cushion against asset-side risk. JM Financial group has put in place adequate credit appraisal, strong risk management and processes which has supported the asset quality metrics. The management too has taken steps in order to reduce concentration risk in the portfolio with focus on growing the retail mortgage portfolio.
On the asset quality side, post the reopening of the lockdowns, underlying collections for real estate segment had improved. Additionally, RBI permitted one-time restructuring scheme as well as extension of date of commencement of commercial operations (DCCO) by another one year (effectively two years) without downgrading the asset classification. As on June 30, 2023, the DCCO book was ~5.2% of the total loan book.
Post September 2021, amidst the macroeconomic environment, the asset quality metrics have inched up with GNPA at 4.3% as on March 31, 2022, (3.5% as of March 31, 2021), the same improved to 3.4% as on March 31, 2023. However, as on June 30, 2023, the GNPA increased to 4.0%. CRISIL Ratings has also noted assets sold to ARC by the NBFCs in the group against which security receipts of ~Rs 406 crore are held as on March 31, 2023.
Nevertheless, the SMA-2 accounts which had increased to 6.2% as on December 31, 2020, improved to 0.1% as on March 31, 2023. However, the same increased to 4.6% as on June 30, 2023 owing to the slippages in the erstwhile DCCO book.
With a fair share of the portfolio being still under moratorium, the ability to get timely recoveries and control incremental slippages, will remain a key monitorables going forward.
Potential funding challenges for wholesale-oriented non-banks
Since September 2018, the operating environment for both NBFCs and HFCs has been challenging in terms of accessing funds, especially for those with a wholesale lending book. Interest from investors in the debt capital market has reduced in the recent past, and a material turnaround is not expected in the near term. As on June 30, 2023, the total borrowings for the group stood at Rs 16,359 crore out of which 81% are long term in nature. The funds raised has been through diversified sources including Commercial papers, Non-Convertible Debentures, Inter Corporate Deposit and Bank loan with improving cost of borrowings. Over a period of time, the company has also managed to diversify its investor base by raising money through retail investors, corporates, high networth individuals, general and life insurance companies, NHB, employees provident fund trusts and mutual funds. The group's commercial paper (CP) borrowings are largely matched by similar maturity short term assets which include capital market and trading assets and assets having short term contractual maturities.