Detailed Rationale

CRISIL Ratings has reaffirmed its ratings of ‘CRISIL AA/Stable/CRISIL A1+’ on the long term bank facility and commercial paper of JM Financial Limited (JMFL).

 

The ratings continue to reflect JM Financial group's continued healthy capitalisation metrics, comfortable and diversified earnings profile, and established track record across its businesses. While the group's asset quality metrics have so far remained moderate, inherent vulnerability to slippages remains a key monitorable. Further, for non-banks with predominantly wholesale book like JM Financial group, the ability to raise funds from diversified sources on regular basis and at optimal rates remains a key monitorable.

 

CRISIL Ratings had taken note of the action by the Reserve Bank of India (RBI), through press release dated March 5, 2024, against JM Financial Products Ltd (JMFPL) and an interim ex-parte order dated March 07, 2024, by the Securities and Exchange Board of India (SEBI) against JM Financial Ltd (JMFL).

 

The RBI had directed JMFPL to cease and desist, with immediate effect, from doing any form of financing against shares and debentures, including sanction and disbursal of loans against initial public offering (IPO) of shares as well as against subscription to debentures. JMFPL, however, could continue to service its existing loan accounts. As per the RBI, their action was based on certain serious deficiencies observed in respect of loans sanctioned by JMFPL for IPO financing as well as non-convertible debenture (NCD) subscriptions. The RBI carried out a limited review of the books of JMFPL on the basis of information shared by SEBI.  As per the press release, the actions of JMFPL in respect of loans sanctioned by JMFPL for IPO financing as well as NCD subscriptions, apart from being in violation of regulatory guidelines, raised serious concerns on governance issues in JMFPL, which in RBI’s assessment was detrimental to the interest of customers. The RBI will review the business restrictions upon completion of a special audit to be instituted by it and after rectification of the deficiencies to the satisfaction of the RBI.

 

Furthermore, SEBI through its interim ex-parte order barred JMFL from taking any new mandate for acting as a lead manager for any public issue of debt securities. However, for existing mandates, JMFL may continue to act as the lead manager for public issue of debt securities for a period of 60 days from the date of the interim ex-parte order. The SEBI interim ex-parte order detailed a particular public issuance of debt wherein JMFL was one of the lead managers. The said interim ex-parte order of SEBI stated that the actions of JMFL appeared to be unfair trade practice under SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulation, 2003, and were in violation of the Code of Conduct under SEBI (Merchant Bankers) Regulations, 1992. The foregoing prima facie observations contained in the interim ex-parte order were made on the basis of material available on record with SEBI. JMFL may, within 21 days from the date of the receipt of the order, file its reply / objections, if any, to this interim ex-parte order and may also seek to avail an opportunity of personal hearing. SEBI shall undertake an investigation into the issues stated under the interim ex-parte order and complete the same within six months from the date of the interim ex-parte order.

 

These regulatory actions by RBI directly impact the business of JMFPL with respect to IPO financing and lending against shares and debentures and by SEBI with respect to being appointed as lead manager to the public issue of debt securities business of JMFL until the satisfactory completion of the special audit / investigation. Net Revenue from these businesses includes net interest income from IPO financing and loans against shares as well as fee income earned from lead managing public issue of debt securities. For nine months ended December 31, 2023, net revenue from these avenues stood at less than 3% of the consolidated net total income of the group. While the impacted LAS book will continue to generate revenues till it runs down, the ability to redeploy the proceeds towards other loan offerings of JMFPL including retail mortgage, financial institutions financing, bespoke lending (to the extent allowed) and real estate financing, in a timely manner remains a monitorable. At this point, CRISIL Ratings believes revenue and net profit contribution from the impacted businesses is not substantial for the group.

 

The leverage of the group continues to be low [1.5 times (gross) as on December 31, 2023] and liquidity profile remains comfortable. As on March 07, 2024, the group had cash and cash equivalents and liquid investments aggregating Rs 4,764 crore against debt obligation (including interest) of Rs 2,874 crore coming up for maturity till June 30, 2024. Moreover, the core businesses of the group, viz equity capital markets, lending, advisory (mergers and acquisition, private equity syndication), private wealth management, mortgage [wholesale and retail (home loans, MSME)] lending, alternative and distressed credit, and asset management, securities (institutional and non-institutional) and elite and retail wealth management are not directly impacted by these orders.

 

Nevertheless, the issues raised by the regulator raises questions on the operational processes and compliances and any developments will remain a key monitorable. CRISIL Ratings will continue to assess the impact of these orders and/or further developments and incremental disclosures pertaining to these orders on the credit risk profile, including fund raising ability, of the JM Financial group.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of all companies, including ARC businesses, within the JM Financial group. The combined approach is because of significant operational and financial integration among group companies, common senior management, and shared brand. All the companies are collectively referred to as the JM Financial group.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy capitalisation

Capitalisation metrics for JM Group remains healthy with networth (including minority interest) of around Rs 11,602 crores as on December 31, 2023 (Rs 10,972 crores as on March 31, 2023) with overall CAR at 37.2% (38.5% as on March 31, 2023). Gearing remained comfortable at 1.5 times as on December 31, 2023 (1.5 times as on March 31, 2023). The management intends to keep the gearing at under 3.5 times at all points in time.

 

The capitalisation metrics have been supported by healthy accruals and capital raises with JM group raising equity of Rs 1,379.4 crores in fiscal 2019 and Rs 770 crores in June 2020. Healthy capitalisation inherently provide cushion against the asset-side risk.

 

• 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. The group has a strong network of borrowers with whom they have long relationship. Over the years the company has also strengthened its risk department.

JM Group investment banking division includes equity capital markets, private equity, debt capital markets and advisory business is amongst the oldest businesses within the JM Financial Group.

 

The group had a loan book of Rs 15,111 crores on a consolidated basis as on December 31, 2023, comprising wholesale mortgage (47%), retail mortgage (18%), bespoke (17%), Financial Institutions Financing (12%) and Capital markets lending (6%). The group forayed in retail lending in FY2017 through products like home loan, LAP and educational institutions lending. As of December 31, 2023, the retail mortgage business had 112 branches. The group intends to focus on growing the retail mortgage portfolio which would provide granularity and further diversification to the AUM.

 

• Comfortable earnings profile

The group's earnings remain comfortable, with total revenue of Rs 3,556 crores and a profit after tax (PAT; post Minority interest) of Rs 639 crores for the nine months ending December 31, 2023 (Rs 3,343 crore and Rs 597 crore, respectively, for fiscal 2023).

 

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 39%, 32%, 10% and 19% respectively of total revenue during nine months ended December 31, 2023. PAT contribution from these segments constituted 64%, 10%, 6% and 7% respectively, during the period.

 

The earnings profile for JM Financial group has been comfortable with an average 5-year ROA of around 3.5% providing sufficient cushion in the earnings profile to withstand any increase in delinquencies. The group reported a ROA of around 2.6% for fiscal 2023 lower than 4.2% for fiscal 2022 owing to elevated provisioning driven in the distressed credit businesses of the group. For nine months of fiscal 2024, the annualized ROA was 3.1%. Any impact on the earnings profile in the event of slippages translating into elevated credit costs would remain monitorable.

 

Weaknesses:

• Asset quality in the wholesale lending business remains inherently vulnerable; albeit risk management processes are comfortable

As on December 31, 2023, the GNPA and NNPA increased to 4.5% and 2.2%, from 3.4% and 2.1% respectively as on March 31, 2023. The increase in GNPA and NNPA was due to account shift from SMA to NPA and there were no material increment slippages.

 

However, retail mortgage GNPA and NNPA stood at 0.8% and 0.4% respectively. Similarly, wholesale mortgage GNPA and NNPA stood at 7.2% and 3.5% respectively.

 

Group’s wholesale segment is vulnerable to slippages in asset quality, which accounts of ~76% of lending book as on December 31, 2023. 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 have 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.

 

• 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. As on December 31, 2023, the total borrowings for the group stood at Rs 17,254 crore out of which ~80% are long term in nature. The funds raised have 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.

Liquidity: Strong

Asset-liability mismatch (ALM) statements of the key lending entities of the group did not show negative cumulative mismatches in the up to 1-year buckets, as on December 31, 2023. At a group level, as on March 07, 2024, the company had cash and cash equivalents and liquid investments aggregating Rs 4,764 crore against debt obligation (including interest) of Rs 2,874 crore coming up for maturity till June 30, 2024.

 

ESG

CRISIL Ratings believes that JMFL’s Environment, Social, and Governance (ESG) profile supports its credit risk profile.

 

The ESG profile of financial institutions typically factors in governance as a key differentiator between them. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on environment and other sustainability related factors.

 

JMFL group has an evolving focus on strengthening various aspects of its ESG profile.

 

JMFL group’s key ESG highlights:

• The Group promotes ecological sustainability and has taken measures to minimise its environmental impact. Digitalisation is one of the platforms, which has helped the Group in reducing the paper and stationery.
• The company believes in investing efforts towards employees’ wellbeing. Company has also taken initiatives for building and enhancing the talent pool. The diversity currently stands at ~20%.
• The governance structure is characterised by 60% of the board members being independent, effectiveness in board functioning and enhancing shareholder wealth, presence of investor grievance redressal mechanism and extensive disclosures. 

 

There is growing importance of ESG among investors and lenders. JMFL group’s commitment to ESG will play a key role in enhancing stakeholder confidence, given presence of foreign investors.

Outlook: Stable

CRISIL Ratings believes the JM Financial group will maintain its healthy financial risk profile over the medium term, supported by strong capitalization and conservative gearing.

Rating Sensitivity factors

Upward factors

• Increase in scale and diversity of operations while substantially increasing the share of non-wholesale lending book at group level.
• Improvement in asset quality metrics and sustenance of earnings profile (RoA > 3.5%) on a steady state basis while diversifying the resource profile and thereby reducing the cost of borrowing.

 

Downward factors

• Deterioration in asset quality over an extended period thereby also impacting profitability
• Challenges in raising funds from diversified sources on consistent basis and at optimal rates
• At a group level, with the current AUM mix i.e. wholesale constituting a substantial portion of AUM, weakening of capitalisation metrics with gearing inching beyond 3 times for an extended period of time; while the gearing in the retail book can be higher

About the Company

JM Financial Limited (JM Financial), is the flagship listed company of the Group. It is an operating cum holding company and is engaged in various financial services businesses on its own and through its subsidiary and associate companies. It holds investments in its subsidiaries that are engaged in various businesses, namely, Non-Banking Financial Services, Asset Reconstruction, Equity Research, Equity Broking to Institutional and non-Institutional  Investors, Wealth Management advisory, Mutual Funds  Asset Management, etc.

About the Group

JM Financial is an integrated and diversified financial services group engaged in various capital markets related lending activities. The Group's primary businesses include (a) Investment bank which shall cater to Institutional, Corporate, Government and Ultra High Networth clients and includes investment bank, institutional equities and research, private equity funds, fixed income, private wealth management, PMS, syndication and finance; (b) Mortgage Lending includes both wholesale mortgage lending and retail mortgage lending (affordable home loans and secured MSME);  (c) Alternative and Distressed credit includes the asset reconstruction business and alternative credit funds; and (d) Platform AWS which shall provide an integrated investment platform to individual clients and includes elite and retail wealth management business, broking and mutual fund business.

 

As of December 31, 2023, the consolidated loan book stood at Rs 15,111 crore, distressed credit business AUM at Rs 15,059 crore, wealth management AUM at Rs 94,523 crore, and mutual fund QAAUM at Rs 4,584 crore.

 

The Group is headquartered in Mumbai and has a presence across 878 locations spread across 232 cities in India. The equity shares of JM Financial Limited are listed in India on the BSE and NSE.

Key Financial Indicators: JM Financial Limited (Consolidated)

Particulars	Unit	Dec 2023	Mar 2023	Mar 2022	Mar 2021	Mar 2020
Total assets (net of goodwill on consolidation)	Rs. Cr.	31,843	29,318	25,762	23,462	20,693
Networth (including NCI and net of goodwill on consolidation)	Rs. Cr.	11,602	10,972	10,453	9,552	7,993
Loan book	Rs. Cr.	15,111	15,653	13,017	10,854	11,531
Total income	Rs. Cr.	3,556	3,343	3,763	3,227	3,454
Profit after tax (before NCI and after share of profit of associate)	Rs. Cr.	705	709	992	808	778
Reported Profit after tax (post NCI)	Rs. Cr.	639	597	773	590	545
Return on assets*	%	3.1	2.7	4.2	3.8	3.5
Return on networth*	%	8.3	7.6	10.6	9.2	10.2
Gross NPA	%	4.5	3.4	4.3	3.5	1.7
Net NPA	%	2.2	2.1	2.7	2.0	1.1
CRAR	%	37.2	38.5	39.4	40.2	38.7
Gearing	Times	1.5	1.5	1.2	1.3	1.5

NCI is non-controlling interest

*annualised

ratios are CRISIL Ratings Calculated

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity  Date	Issue Size  (Rs. Crore)	Complexity Level	Rating Outstanding  with Outlook
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	100	NA	CRISIL AA/Stable
NA	Commercial Paper Programme	NA	NA	7-365 Days	300	Simple	CRISIL A1+

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
JM Financial Products Limited	Full	Subsidiary
JM Financial Credit Solutions Limited	Full	Subsidiary
JM Financial Services Limited	Full	Subsidiary
JM Financial Institutional Securities Limited	Full	Subsidiary
JM Financial Commtrade Limited	Full	Subsidiary
JM Financial Overseas Holdings Private Limited	Full	Subsidiary
JM Financial Singapore Pte Limited	Full	Subsidiary
JM Financial Securities, Inc	Full	Subsidiary
JM Financial Home Loans Limited	Full	Subsidiary
Infinite India Investment Management Limited	Full	Subsidiary
JM Financial Asset Management Limited	Full	Subsidiary
JM Financial Properties and Holdings Limited	Full	Subsidiary
JM Financial Asset Reconstruction Company Limited	Full	Subsidiary
CR Retail Malls (India) Limited	Full	Subsidiary
JM Financial Trustee Company Private Limited	Equity method	Associate
Astute Investments	Full	Subsidiary
Arb Maestro AOP	Full	Subsidiary