Focus on the small finance banking space. Nuvama Institutional Equities initiated its coverage on Jana Small Finance Bank with a ‘Buy’ rating. The brokerage firm sees an upside of 43% at a target price of Rs 600 from its current market price of Rs 419.
Nuvama initiated coverage on the stock as it finds the valuations attractive, expects stability in return ratios, and better asset quality.
Growth in secured loan book
Not just that, the bank has brought down its unsecured loan book to 32% as of Q3 FY25, compared to 50% in FY22. The share of the secured portfolio rose 68% from 50% in FY22. Furthermore, CASA mobilisation, loan-to-deposit ratio, and overall asset quality have also improved. In the past three years, it has improved its deposit franchise to 27% CAGR over FY22–Q3FY25 despite having a lot of competition.
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“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,” said Nuvama in a research report.
Asset quality to stay strong
The bank’s asset quality in the first half of the current financial year deteriorated a bit given the rising stress in the microfinance institutions segment. Also, its portfolio deterioration was minimal compared to other NBFCs when its gross-non-performing assets rose. Furthermore, the management believes the stress to have peaked for the small finance bank and expects the asset quality to improve in FY26. “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,” said Nuvama.
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Nuvama believes that the bank has the scale to achieve sustainable profitability given the focus on stronger deposit mobilization, it’s changing loan mix towards secured lending, better operating leverage, and normalization of credit cost amid better asset quality.
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