Jana Small Finance Bank - Asset Quality Continues To Improve On Adequate Risk Monitoring: Systematix

Systematix Report

We met the management of Jana Small Finance Bank Ltd. during its Q4 FY24 earnings analyst meet.

Key takeaways from the event were:

1. Guidance for next two-three years: Advances and deposit compound annual growth rate of 20% versus 25% CAGR FY21-24; Pre-provision operating profit CAGR of 20-25% versus 40% CAGR FY21-24 (on low base); profit after tax growth of 30-40% versus 110% CAGR FY21-24; Opex growth of 8-10% versus 15% CAGR FY21-24; return on assets of 1.8-2% (ex-future deferred tax asset recognition) versus 1.8% in FY24 (ex DTA recognition); RoA of 2.5% (including DTA recognition) versus 2.4% in FY24 (including DTA recognition); RoE of 19-21% (ex-future DTA recognition) versus 20.7% (ex DTA recognition);

2. Jana SFB aspires to be one stop shop for customer’s financial needs with home loan being the anchor product;

3. Key tenet of the bank's strategy is to focus on the secured book and grow it such that secured book share increases from current 60% to ~75-80% in three years, with the balance growth being in unsecured portfolio.

4. Management reiterated that they would prefer steady return on equity across cycles rather than introduce volatility to earnings due to high risk / high return unsecured portfolio.

5. Profit after tax CAGR of 110% in FY21-24 was on a low base. The bank is targeting PAT CAGR of 30-40% in near term. Yield compression from higher share of secured book will be offset by funding cost reduction due to expected improvements in current account saving account ratio from 20% to 30%, reduced opex and lower credit costs due to higher secured mix. This should enable the bank to deliver return on assets (ex DTA) of 1.8-2.0% and RoE of ~20% in near term

6. No capital raise plans for next three years.

7. The bank would need one more year to meet the criteria set for transitioning from SFB to universal bank.

It will most likely apply for universal banking license around June 2025. Jana SFB trades at FY24 price booking of 1.7 times for FY24 RoA of 1.8% (ex DTA benefit) and FY25 guided RoA of ~1.8-2.0%.

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