| JM Financial Limited | ||
| Rating Reaffirmed | ||
| Rating Action | ||
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| 1 crore = 10 million | ||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has reaffirmed its rating on JM Financial Limited (JMFL) commercial paper programme at 'CRISIL A1+'. |
| Analytical Approach |
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For arriving at its ratings, CRISIL has combined the business and financial risk profiles of all companies within the JM Financial group, including the NBFC, JM Financial Credit Solutions Ltd where a fund raised by Mr. Vikram Pandit has 48.62% stake. The group also includes JM Financial Asset Reconstruction Company Ltd (JMARC; rated 'CRISIL AA-/Stable/CRISIL A1+') where JM Financial Group has 59.25% stake and is now a subsidiary of JMFL. This is because of the significant operational and financial integration among the group companies, and their common senior management team and shared brand. All the companies are collectively referred to as the JM Financial group. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Healthy capitalisation The overall wholesale segment is facing challenges on account of funding constraint and lack of demand which makes the segment vulnerable to slippages in asset quality. Since the company maintains healthy capitalisation, it inherently provides cushion against the asset-side risk. Capitalisation is supported in the form of fresh equity as well as healthy accruals to networth. Capitalisation metrics remain healthy with networth (including minority interest) of around Rs 7,825 crore as on December 31, 2019 with overall CAR at 35.0% as on December 31, 2019 (31.5% as on March 31, 2019). Over the past five fiscals, the peak gearing for the company was at 2.6 times in March 2018 and currently stands at 1.7 times as on December 31, 2019. The cash and cash equivalents held in the group amount to Rs.3,218 crore as of December 2019. The Net Debt to Equity as of December 2019 on a consolidated basis stood at 1.3x. The debt to equity is the lowest amongst the peers. The capitalization has been possible by proactive capital raises with JM Financial group raising equity of Rs 1,379.4 crores in fiscal 2019 which support the capitalization metrics. This provides cushion to mitigate potential asset-side slippages. CRISIL believes the gearing would remain below 3 times on a steady state basis in the near term. * Established market position across its businesses The group has developed a strong franchise in key operating segments such as investment banking, wealth management, and securities-based lending. This is aided by the track record and reputation of its experienced management and healthy client relationship. Furthermore, management has been conservative in its risk philosophy. The group has strong network of borrowers with whom they have long relationship and has never faced any asset quality issues. Over the years the company has strengthened its risk department. * Diversified business model and comfortable earnings profile The group's earnings remain comfortable, with total revenue of Rs 2,613 crore and a profit of Rs 414 crore for first nine months of fiscal 2020. 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 grown its investment banking, wealth management and securities business and mortgage lending business and it constituted around 49% and 38% of total revenue, respectively, as on December 31, 2019. Profit after tax (PAT) contribution from these segments has also been high and constituted 58% and 34% of total PAT of the company. The earnings profile for JM group has been comfortable with an average 5 year ROA of greater than 4.5% providing sufficient cushion in the earnings profile to withstand any increase in delinquencies The group reported a ROA1 of around 3.6% for first nine months of fiscal 2020 compared to 3.7% for full fiscal 2019. However, CRISIL believes the group might face reduction in revenue and profit on account of stressed economic environment, hence would remain a key monitorable. The group has also forayed into housing finance business through JM Financial Home Loans Limited. JM Financial Home Loans Limited has expanded its branch presence to 27 locations. It has recently entered into a co-lending arrangement with Bank of Baroda. The ability to scale up the home loans business will be a monitorable. Weakness: * Asset quality in the wholesale lending business remains inherently vulnerable; albeit risk management processes are comfortable Asset quality of the wholesale lending business remains susceptible to the performance of the real estate sector and financial flexibility of borrowers. With rising borrowing cost and slowdown in disbursements by non-banks - mainly to wholesale borrowers, refinancing risks for real estate players has increased. The company has put in place adequate credit appraisal, strong risk management and processes which has supported the asset quality metrics. At a group level, GNPA has been low (GNPA of 1.56% as of December-2019) over the last 3 years, and the SMA-2 accounts in the book improved to 1.18% of the loans as on December 31, 2019 compared to 3.61% as on June 30, 2019. The management too has taken steps in order to reduce concentration risk in the portfolio with focus on growing the individual housing loans portfolio. But, what has really supported the asset quality metrics in the past, has been the ability of the entity to get timely repayments/exits via refinancing and scheduled repayments. Nevertheless, with some portion of the book still under moratorium, ability to get timely refinance/exits especially in the current environment and maintain asset quality metrics remains a key monitorable. Credit risk profile is supported by strong risk management practices to deal with market, credit, liquidity, operational, and counterparty risks, which mitigate the risk of potential losses in the broking and lending businesses. Track record of low delinquencies and negligible write-offs in the broking and securities-based lending businesses, despite cyclicality in equity markets, underscores the adequacy of the group's risk management systems. The group has also put in place strong practices to manage inherent risks in the wholesale lending business while growing the lending book. It continues to follow prudent lending policies and has put in place additional controls in recent quarters to manage increased stress in the real estate sector. It focuses on providing funding to select builders/corporates with robust performance track record and with which it has had prior business association. A team of experienced professionals undertakes detailed due diligence, including stress testing, to assess the credit quality of borrowers. The portfolio is regularly monitored, including regular and detailed discussion with borrowers, and end-use monitoring of funds. All the loans are adequately covered by collateral (of 1.5-2.0 times) at all points in time. The group has demonstrated ability to resolve delinquencies in the portfolio at an early stage through identification and quick exit. * Potential funding challenges for wholesale-oriented non-banks Since September 2018, the operating environment for non-banking financiers {non-banking financial companies (NBFCs) including housing finance companies (HFCs)} has been challenging in terms of accessing funds, especially for those with a wholesale lending book. Interest from investors in the debt capital market has reduced in the recent past, and a material turnaround is not expected in the near term. However, over this period, JM Financial group has managed to raise long term funds aggregating over Rs 5000 crores. 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 |
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At a group level, as on December 31, 2019, the group had total debt repayment of Rs 3,223 crore (out of which commercial paper stood at Rs 1,540 crore) till June 2020. In addition to scheduled collections, the group had cash and equivalent of Rs 3,218 crore and unutilised bank line of Rs 674 crores. |
| Outlook: Stable |
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CRISIL believes the JM Financial group will maintain its healthy financial risk profile over the medium term, supported by strong capitalisation, conservative gearing, and high profitability. |
| Rating Sensitivity factors |
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Upward factors * Maintenance of comfortable asset quality metrics and earnings profile (RoA > 4%) on a steady state basis while substantially increasing the share of non-wholesale lending book at group level. * Increase in funding access to pre-September 2018 levels on a steady state basis while substantially increasing the scale of operations 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 * Weakening of capitalisation metrics with gearing inching beyond 3 times for an extended period of time |
| About the Group |
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JM Financial is an integrated and diversified financial services group. The Group's primary businesses include (a) Investment banking, wealth management and securities business (IWS) which includes fee and fund based activities for its clients (b) Mortgage Lending which includes both wholesale mortgage lending and retail mortgage lending (home loans, education institutions lending and LAP) (c) Distressed credit which includes the Asset Reconstruction business (d) Asset Management includes the mutual fund business. |
| Key Financial Indicators (JM Financial group) | ||||||||||||||||||||||||||||||
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Rating Withdrawn | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - List of entities consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
| Links to related criteria |
| Rating Criteria for Finance Companies |
| CRISILs Criteria for Consolidation |
| CRISILs Criteria for rating short term debt |
| For further information contact: | ||||||
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