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Jana Small Finance Bank Limited — Q2 FY25 earnings call

Call held 21 Oct 2024

Management summary

Jana Small Finance Bank reported a challenging first half of FY25, marked by a 7% de-growth in its unsecured book and elevated provisions of INR 115 crore to manage asset quality. Despite this, the bank demonstrated strong execution on its strategy to become a secured lender, with secured advances growing 16% and now forming 65% of the total book. Management expressed confidence in a stronger second half, anticipating lower credit costs and a recovery in profitability, while also revising down its PAT growth target for H2 from 30-40% to closer to 30%.

Highlights

Deposits grew 31% YoY and 10% in H1 FY25, with CASA growth at 12% in H1.
Advances grew 17% YoY and 7% in H1 FY25, with secured advances growing 16% in H1 and now comprising 65% of the total book.
Unsecured business de-grew by 7% in H1 FY25, with Microfinance Gross NPA at 4.97%.
Net Interest Margin (NIM) stood at 7.7%, and the cost of funds was 8.1% for Q2 and H1 FY25.
Gross NPA was 2.86% and Net NPA was 0.95%, with a Provision Coverage Ratio (PCR) of 67.2% (secured PCR elevated to 29.7%).
Profit After Tax (PAT) for H1 FY25 was INR 267 crore, after taking an additional provision of INR 115 crore.
Affordable Housing & Micro LAP crossed INR 10,000 crore, and Gold Loan business grew 67% in H1 FY25.
Capital Adequacy Ratio (CAR) was 18.8% (Tier 1 at 17.8%), and Liquidity Coverage Ratio (LCR) was 261%.

Concerns

Stress in Microfinance (MFI) Business
Impact on Profitability from Unsecured Book De-growth

Key financials

2 periods

Headline

Deposits Growth
10%
YoY +31%
Advances Growth
7%
YoY +17%
Secured Advances Growth
16%
Unsecured Advances Growth
-7%
Gross NPA
2.9%
Net NPA
0.95%
PCR
67.2%
NIM
7.7%
Cost of Funds
8.1%
CASA Ratio
20.1%
Capital Adequacy
18.8%
LCR
261%
ROA
1.6%
ROE
14.5%

H1 FY25

PAT
₹267 Cr
Net Credit Cost
1.9%

What they filed

Q1 FY27: revenue up 22.1%, net profit up 52.0% against the same quarter last year.

₹ Cr · quarterly

Line item	Q2 FY25	Q3 FY25	Q4 FY25	Q1 FY26	Q2 FY26	Q3 FY26	Q4 FY26	Q1 FY27
Revenue	1,166	1,177	1,184	1,241	1,305 +12%	1,374 +17%	1,445 +22%	1,515 +22%
Expenses	681	665	696	750	791	899	861	854
Other income	176	177	234	266	247	245	266	227
Interest	572	585	602	655	686	709	709	732
Depreciation	0	0	0	0	0	0	0	0
Profit before tax	88	105	120	102	75 −15%	10 −90%	140 +17%	155 +52%
Tax rate	-9%	-5%	-3%	0%	0%	0%	0%	0%
Net profit	97	111	123	102	75 −23%	10 −91%	140 +14%	155 +52%
EPS	9.25	10.56	11.75	9.69	7.13	0.92	13.28	14.74

How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

Affordable Housing & Micro LAP
₹10,000 Cr Book Size50% Affordable Housing LTV36% Micro LAP LTV
MSME Loans
16.5% Growth (YoY)12.9% Growth (H1)
Gold Loan
80% Growth (YoY)67% Growth (H1)
Microfinance (Unsecured)
-6.5% Growth (H1)5% Gross NPA₹36,000 Average Ticket Size
BC Book (Microfinance)
-11% Degrowth (H1)9.7% Gross NPA0.7% Net NPA93.4% PCR

Guidance & targets

Profitability

Cost-to-Income Ratio Profitability · H2 FY25 · Medium confidence late 50s

our credit cost in the second half, our cost income coming back towards late 50s that it used to be, should be things that one can expect

— Ajay Kanwal
PAT Growth Profitability · H2 FY25 · Medium confidence closer to 30%

Previously 30-40% → closer to 30%

I think it's fair to say the 40% may not be a possibility now. More closer, we will be fighting the 30% answer, is how I look at it.

— Management

Credit Growth

Unsecured Advances Growth Credit Growth · H2 FY25 · Medium confidence not have a drop by 7%

First, we will not have a drop in unsecured by 7%. This means revenues will be better, and fee income will be better.

— Management
AUM Growth Credit Growth · H2 FY25 · High confidence 20%

AUM growth of 20%, I think is not a risk. It is something that I do think we will hit in second half.

— Management
Asset Growth Rate Credit Growth · H2 FY25 · High confidence 20%

Asset growth rate of 20%, yes.

— Management

Asset Mix

Secured Advances % of Total Asset Mix · End of FY25 · High confidence 68-70%

Previously 67-68% → 68-70%

we were anticipating to become a 67% to 68% secured by the end of the year. We'll probably aim between a 68% and a 70% now.

— Management

Asset Quality

Net NPA Asset Quality · Next year (FY26) · High confidence below 1%

We have to have net NPA below 1%.

— Management
Gross NPA Asset Quality · Next year (FY26) · High confidence below 3%

We have to have gross NPA below 3.

— Management

Risks & concerns

Stress in Microfinance (MFI) Business
high

H1 FY25 saw a 7% de-growth in the unsecured book, with Gross NPA at 4.97%, driven by issues in the BC network (9.7% GNPA in BC book) related to customer leverage, BC performance, and employee attrition.

Management acknowledged
Impact on Profitability from Unsecured Book De-growth
high

The negative growth in the unsecured book led to a drop in fee income, overall revenue, elevated collection costs, and increased provisioning, impacting H1 profitability.

Management acknowledged
Higher Cost of Funds due to High LCR
medium

The bank's cost of funds at 8.1% is higher than peers, attributed to a conscious strategy to maintain a very high LCR of 261% (compared to industry average of 130-150%) for a solid liability franchise.

Analyst acknowledged
Industry-wide MFI Operating Environment Challenges
medium

The broader MFI sector faces challenges related to customer leverage and competitive growth strategies, leading Jana to adopt a more guarded approach to MFI business contribution in the future.

Analyst acknowledged

Areas of evasion (1)

Exact rupee value of interest reversals due to slippages

Q&A highlights

3 direct

Confidence in H2 FY25 performance improvement despite MFI challenges Direct

First, we will not have a drop in unsecured by 7%. This means revenues will be better, and fee income will be better. Second, we will not see an elevated provision like we saw in the first half because what is the biggest flow-through possibility they've all flown through. I did mention that you've seen a 98%, 99% collection in the quarter two.

Analyst questioned the basis for H2 optimism given H1 MFI stress; management provided specific operational and financial reasons for expected recovery.

Asked by Manish Ostwal

Accounting for Business Correspondent (BC) tie-ups, First Loss Default Guarantee (FLDG), and high GNPA in BC book Direct

It is based on disbursals and not portfolio, which is why if you see page number 10, where while the gross NPA is 9.7%, it doesn't mean we are out of pocket because our service guarantee is on disbursal amount and not on outstanding. So we have a lot more money than the current average outstanding of all BCs.

Clarified the financial protection mechanism for BC partnerships and the specific operational reasons (CSP points, fast growth) for higher GNPA in a few BCs, addressing a key asset quality concern.

Asked by Shailesh Kanani

Sequential decline in Pre-Provision Operating Profit (PPOP) and impact of secured book growth on yield, along with risk to PBT guidance Direct

The real big change in the first half is negative 7% in the unsecured book. My rough estimate of revenue loss it has caused, if I add that with some interest and sustenance high-level estimation, it should be between INR 100 crore to INR 120 crore. That is the primary reason of change. ... I think it's fair to say the 40% may not be a possibility now. More closer, we will be fighting the 30% answer, is how I look at it.

Management explained the drivers of PPOP decline (unsecured book de-growth, lower PSL income) and provided a revised, more realistic PAT growth outlook for H2, indicating transparency on profitability challenges.

Asked by Gautam Jain

3 min read 6 chapters

Detailed narrative

H1 FY25 Performance and Strategic Execution

Jana Small Finance Bank reported a mixed H1 FY25, with deposits growing 31% YoY and 10% in the first half, driven by 12% CASA growth. Advances increased 17% YoY and 7% in H1. A key strategic achievement was the continued pivot towards secured lending, with the secured book growing 16% in H1 and now constituting 65% of total advances, up from 60% in March. Profit After Tax (PAT) for H1 FY25 stood at INR 267 crore, reflecting a tough half but consistent execution of the bank's long-term strategy.

Asset Quality and Provisioning Strategy

The bank's asset quality metrics showed a Gross NPA of 2.86% and a Net NPA of 0.95%. To maintain Net NPA below 1%, an additional provision of INR 115 crore was made in H1 FY25 (INR 61 crore in Q2). The Provision Coverage Ratio (PCR) was 67.2%, with the secured PCR specifically elevated to 29.7% from 18% in March, demonstrating a conservative approach to provisioning. Management indicated that the credit cost on the unsecured side has likely peaked.

Microfinance Business Challenges and Mitigation

The unsecured microfinance business faced stress, leading to a 7% de-growth in H1 FY25 and a Gross NPA of 4.97%. A significant contributor to this stress was the Business Correspondent (BC) network, particularly 3 out of 17 BCs, where issues like the use of CSP points and rapid growth led to a BC book Gross NPA of 9.7%. In response, the bank has tightened credit norms, reducing total unsecured customer exposure to INR 1.25 lakhs and implementing stricter guardrails on BC growth, while shifting collection resources to early buckets.

Growth in Secured Segments and Diversification

The bank's secured portfolio demonstrated robust growth and strong asset quality. The Affordable Housing and Micro LAP businesses collectively crossed INR 10,000 crore, with healthy LTVs of 50% and 36% respectively. MSME loans grew 16.5% YoY and 12.9% in H1, while the Gold Loan business saw exceptional growth of 80% YoY and 67% in H1. This diversification and strong performance in secured segments underpin the bank's strategy to become a broad financial services provider.

Profitability, Margins, and Cost of Funds

Net Interest Margin (NIM) remained stable at 7.7% despite the de-growth in the high-yielding MFI book. The cost of funds for Q2 and H1 FY25 was 8.1%, which management acknowledged as higher than peers but justified by a conscious strategy to maintain a high Liquidity Coverage Ratio (LCR) of 261%. The sequential decline in Pre-Provision Operating Profit (PPOP) was attributed to a drop in PSL income (INR 40 crore in Q1 vs INR 10 crore in Q2) and reduced fee income from lower unsecured disbursements, estimated at INR 100-120 crore revenue loss.

Outlook and Guidance for H2 FY25 and Beyond

Management expressed confidence in a stronger H2 FY25, anticipating lower credit costs, higher disbursals, and improved fee and interest income, as the peak of unsecured stress is believed to be over. The bank aims for 20% AUM growth in H2 and is targeting PAT growth closer to 30% for the second half, a revision from the earlier 30-40% range. For the next fiscal year, Jana Small Finance Bank is committed to maintaining Net NPA below 1% and Gross NPA below 3% as it prepares for conversion to a universal bank.

This is an AI-generated summary of a publicly available earnings call transcript.

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