Thanks for the clarification. Though I do find it difficult to digest that some entity can continue to be overvalued for long periods of time just on basis on this one word TRUST.
I remember even in capital first these guys were posting ROE of 6 to 8 in 2015 and always valued 3.5 to 4 price to book while Indiabulls was posting 25 return on equity and had price to book of 1.2 times.
Even then I could not understand what is going on.
Regarding credit cost they have said that more credit cost in JLG is because of “multiple factors such as general deterioration in JLG customers behaviour, Chennai floods etc. To speflcifically quote the letter in Annual report.
Quote “For FY25, we expect provisions to be more upfront in H1-FY25 due to normalisation of credit costs post COVID, impact on MFI book in recent floods in Tamil Nadu, and a reduction in center-meeting discipline in MFI, among other factors. We havecommunicated this during Analyst calls for Q4 FY24 and Q1 FY25. We will monitor performance on this portfolio and will share with the street faithfully. Except MFI, the rest of the book is performing on expected lines.
The microfinance business is crucial for us as it helps meet our PSL targets of lending 12% of the portfolio to weaker sections. Therefore, in terms of risk-reward and profitability, this business is important to us.
Overall, over the past five years, our credit performance remains within our overall internal risk frameworks and aligns with our public guidance.” Unquote
To me, one product JLG, having higher credit cost is not an issue, every microfinance company has reported this issue so looks to be consistent with the market. Indeed if they get 1.85% credit cost for the bank as a whole, it would be “normalization” to pre-COVID levels as mentioned by the management. Frankly 1.85% would be amazing considering that the NIM is 6.3%. In fact, the question is the other way round can the bank sustain credit cost at only 1.85%.
One thing stand out the credit cost of this bank post covid from FY 22 to FY24 put together is only 1.6%. So thus far they have been able to maintain low credit cost even after COVID. Sp when the chips are down they have delivered low credit cost.
Compare this to Yes bank (major cleanup of 16% in FY 21), Bandhan bank (4%-6% for 3 years after covid), Indusind bank (v high provisions during COVID, etc, this bank has low provisions to average book thus far post covid. Even post demonetisation etc it was low.
The issue is not credit cost frankly its their strength. Looks like they have a good stable model. I have been watching it from capital first time. The issue is cost to income ratio.
They have guided for higher credit cost (effectively lower PAT in Q2 25 lets see where it goes. But more importantly, lets see if they can maintain deposit growth, they have cut deposit rates to 3% upto 5 lacs. Overall it’s a bank in the making with many changes all the time. To quote you, we have to only sit in “TRUST”, humour and pun intended.
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