• Jana Small Finance Bank (JSFB), since inception has focused on financial inclusion by serving underserved and unbanked populations in India. It evolved from an NBFC to an NBFC-MFI, then to a small finance bank, and became a scheduled commercial bank in 2019.
• In the past six years, JSFB has seen a remarkable transformation, particularly after the appointment of Mr Ajay Kanwal as CEO in August 2017. The change ushered in a fresh strategic direction and a clear focus on key growth areas such as: i) a shift towards a more balanced and secured retail loan book, ii) reshaping its microfinance book, iii) enhancing its deposit base, and iv) advancing its technological capabilities. These initiatives have started bearing fruit with the share of unsecured loan book falling to ~32% as of Q3FY25 from 50% in FY22, while the share of the secured portfolio rising to 68% from 50% in FY22. Furthemore, CASA mobilisation, loan-to-deposit ratio, and overall asset quality have also improved.
• JSFB is the fourth largest small finance bank in terms of advances and deposits as of Q3FY25. It boasts an AUM of INR27,984cr and has 778 banking outlets (including 252 outlets in unbanked rural centres) spread across 22 states and two Union Territories.
• Initially, the bank faced delays in establishing liability branches due to lower profitability and in the aftermath of demonetisation and the COVID-19 pandemic. But in the past three years, it has improved its deposit franchise (27% CAGR over FY22–Q3FY25) despite competition.
• It intends to apply for a Universal Bank licence in Q1FY26 by focusing on adhering to all requirements such as maintaining GNPA/NNPA under 3%/1% for two consecutive fiscals and reporting net profits for the last two financial years. Upon transitioning, the management expects the cost of deposits to fall by ~25bp along with enhanced growth in CASA and total deposits.
• While FY25 could see a moderation in profitability due to higher credit cost and de-growth in its MFI loan book. FY26 is likely to be a normalized year with easing credit costs, healthy return ratios and stable growth on the balance sheet front. With attractive valuations and favorable risk-reward ratio we initiate coverage with a ‘BUY’ rating and a TP of INR600 (1.1x FY27E ABV).
Secured loan book to drive credit growth at an accelerated pace
Since its transformation into an SFB, JSFB has seen a significant transition to secured book (backed by collateral) from unsecured loans. Its secured book grew at 39% CAGR over FY22-Q3FY25, taking overall share of secured book to 68% in Q3FY25 from 50% in FY22. The accelerated growth in secured book led total loan book to grow at a CAGR of 25% during the same period. We expect its gross loan book to clock 21% CAGR over FY24–27E, with an expected increase in the share of secured loans to ~80% by the end of FY27E from 68%, in line with the management’s guidance.
Asset quality to stay strong post a temporary blip
• Asset quality in H1FY25, deteriorated marginally given the rising stress in the MFI segment. Incidentally, JSFB rise in GNPA was minimal in contrast to the widespread deterioration in quality of portfolio for some NBFC’s, SFB and also in some private banks which have exposure in MFI. Furthermore, the management believes the stress to have peaked for JSFB and expects the asset quality to improve in FY26. The banks shift towards secured lending, with strong underwriting mechanism, guarantee programs undertaken for unsecured loans, reduced dependence on BC channels along with a shift towards individual loans from group loans has helped asset quality to remain stable even in the tough market in FY25. However, we shall continue to keep a close watch on asset quality, particularly in the microfinance space, until there is a meaningful turnaround visible at the system level.
Return ratios to stay strong in near-term but normalize post-FY27 amid tax adjustments
• Concerted effort to boost retail deposits and CASA has helped deliver stable NIM’s, despite increasing share of secured loans. For FY25, opex is expected to remain elevated due to incremental efforts for collection; however it is likely to start easing from FY26 on account of moderation in collection cost and increasing operating efficiency. Moving towards secured loans will also restrict slippages and eventually credit cost. We expect return ratios to remain elevated on account of moderating opex and credit cost. Hence; we have projected ROA of 1.7%-1.9% and ROE of 16%-18% for FY26-27E. It is pertinent to note that, the bank holds an unrecognized Deferred Tax Asset (DTA) of ~INR 735 crore, enabling tax-free operations until FY27.
Valuation and view
• The bank has the scale to achieve sustainable profitability given focus on stronger deposit mobilization, its changing loan mix towards secured lending, better operating leverage and normalization of credit cost amid better asset quality. This will help JSFB maintain a RoA of 1.7–1.9% in FY26E-FY27E. Given the attractive valuations, expected stability in return ratios and better asset quality, we initiate coverage with a ‘BUY’ rating and a TP of INR600 with an upside of 43% from its CMP.
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