Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Stable’ rating to Rs.250 crore non convertible debentures of JM Financial Services Limited (JMFSL) and has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper.

 

The ratings continue to reflect JM Financial group's continued healthy capitalisation metrics, comfortable and diversified earnings profile, and established track record across its businesses. While the group's asset quality metrics have so far remained moderate, inherent vulnerability to slippages remains a key monitorable. Further, for non-banks with predominantly wholesale book like JM Financial group, the ability to raise funds from diversified sources on regular basis and at optimal rates remains a key monitorable.

 

On April 20, 2023, JM Financial Ltd has filed on stock exchanges that the Hon'ble NCLT has pronounced the order of approving the Scheme of Arrangement (“Scheme”) between JM Financial Capital Limited, JM Financial Services Limited and JM Financial Limited. The Scheme has now become effective upon filing of the certified copy of order with Registrar of Companies, Mumbai, Maharashtra.

 

Post implementation of the said scheme of arrangement, CRISIL Ratings does not see any material impact on business and the capital structure of the group on a consolidated basis.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of all companies within the JM Financial group. This also includes the non-banking financial company (NBFC), JM Financial Credit Solutions Ltd, where a fund raised by Mr. Vikram Pandit has 48.96% stake; as well as JM Financial Asset Reconstruction Company Ltd (JMARC; rated ‘CRISIL AA-/Stable/CRISIL A1+’), in which the group has 58.28% effective stake. The combined approach is because of significant operational and financial integration among group companies, common senior management, and shared brand. All the companies are collectively referred to as the JM Financial group.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy capitalisation

The group maintains healthy capitalisation, inherently providing cushion against the asset-side risk. Capitalisation is supported in the form of fresh equity as well as healthy accruals to networth. Capitalisation metrics for JM Group remains healthy with networth (including minority interest) of around Rs 11,153 crores as on June 30, 2023 (Rs 10,972 crores as on March 31, 2023) with overall CAR at 35.8% (38.5% as on March 31, 2023). Over the past five fiscals, the peak gearing for the company was at 2.8 times in December 2017 and remained comfortable at 1.45 times as on June 30, 2023 (1.47 times as on March 31, 2023). The Net Debt to Equity as of June 30, 2023 on a consolidated basis stood at 1.34 times (1.25 times as on March 31, 2023). The capitalisation metrics have been supported by proactive capital raises with JM group raising equity of around Rs 1,379.4 crores in fiscal 2018-2019 and Rs 770 crores in June 2020.

 

• Established market position across its businesses and diversified business model

The group has developed a strong franchise in key operating segments such as investment bank, platform AWS, alternative and distressed credit and mortgage 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 a strong network of borrowers with whom they have long relationship. Over the years the company has also strengthened its risk department. Since 2018, the group has forayed into retail finance, especially housing finance loans. While the share of the same to the overall portfolio remains small, the infrastructure has been scaled up and processes and systems have been put in place. As of June 30, 2023, the retail mortgage business has 93 branches. The group intends to focus on growing the retail mortgage portfolio which would provide granularity and further diversification to the AUM.

 

• Diversified business model and comfortable earnings profile

The group had a loan book of Rs. 15,891 crores on a consolidated basis as on June 30, 2023, comprising wholesale mortgage (50%), retail mortgage (13%), bespoke (20%), Financial Institutions Financing (10%) and Capital markets lending (7%). The group forayed in retail lending in FY2017 through products like home loan, LAP and educational institutions lending.

 

The group's earnings remain comfortable, with total revenue of Rs 3,343 crores and a profit after tax (post Minority interest) of Rs 597 crores for the fiscal 2023 (Rs 3,763 crore and Rs 773 crore, respectively, for fiscal 2022). The decline in profits in fiscal 2023 is largely attributed to a one-time additional provisioning of Rs 246 crore done for certain large corporate security receipts; adjusting for the same, profits stood at Rs 705 crore. During the first quarter of fiscal 2024, the total revenue stood at Rs 1,081 crore with profit after tax (post Minority interest) of Rs 166 crore.

 

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 strengthened its investment bank segment primarily through fixed income capabilities and improving synergies and product capabilities. The investment bank, mortgage lending, alternative and distressed credit and Platform AWS business constituted around 38.9%, 39.4%, 4.1% and 16.8% respectively of total revenue for fiscal 2023. Profit after tax (PAT) contribution from these segments constituted 62.1%, 27.0%, -12.3% and 4.3% respectively, during the period. The earnings profile for JM Financial group has been comfortable with an average 5-year ROA of around 4.0% providing sufficient cushion in the earnings profile to withstand any increase in delinquencies. The group reported a ROA of around 2.7% for fiscal 2023 lower than 4.0% for fiscal 2022 owing to elevated provisioning driven in the distressed credit businesses of the group. For the 3 months of fiscal 2024, the annualized ROA was 2.4%. Any impact on the earnings profile in the event of slippages translating into elevated credit costs remains monitorable.

 

Weaknesses:

• Asset quality in the wholesale lending business remains inherently vulnerable; albeit risk management processes are comfortable

At a sectoral level, what has supported the asset quality metrics of wholesale non-banks in the past, has been the ability of the entity to get timely repayments/exits via refinancing or event-linked fund inflows. Further, at a sectoral level, the wholesale segment is vulnerable to slippages in asset quality. However, JM group has so far managed its portfolio prudently and faced limited slippages. The group maintains healthy capitalisation, which inherently provides cushion against asset-side risk. JM Financial group has put in place adequate credit appraisal, strong risk management and processes which have supported the asset quality metrics. The management too has taken steps in order to reduce concentration risk in the portfolio with focus on growing the retail mortgage portfolio.

 

On the asset quality side, post the reopening of the lockdowns, underlying collections for real estate segment had improved. Additionally, RBI permitted one-time restructuring scheme as well as extension of date of commencement of commercial operations (DCCO) by another one year (effectively two years) without downgrading the asset classification. As on June 30, 2023, the DCCO book was ~5.2% of the total loan book.

 

Post September 2021, amidst the macroeconomic environment, the asset quality metrics have inched up with GNPA at 4.3% as on March 31, 2022, (3.5% as of March 31, 2021), the same improved to 3.4% as on March 31, 2023. However, as on June 30, 2023, the GNPA increased to 4.0%. CRISIL Ratings has also noted assets sold to ARC by the NBFCs in the group against which security receipts of ~Rs 406 crore are held as on March 31, 2023.

 

With a fair share of the portfolio being still under moratorium, the ability to get timely recoveries and control incremental slippages, will remain a key monitorables going forward.

 

• Potential funding challenges for wholesale-oriented non-banks

Since September 2018, the operating environment for both NBFCs and 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 been reduced in the recent past, and a material turnaround is not expected in the near term. As on June 30, 2023, the total borrowings for the group stood at Rs 16,359 crore out of which 81% are long term in nature. The funds raised has been through diversified sources including Commercial papers, Non-Convertible Debentures, Inter Corporate Deposit and Bank loan with improving cost of borrowings. Over a period of time, the company has also managed to diversify its investor base by raising money through retail investors, corporates, high networth individuals, general and life insurance companies, NHB, employees provident fund trusts and mutual funds. 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

At a group level, as on June 30, 2023, the group had total debt repayment (including interest) of Rs 1,197 crores till Aug’ 2023. In addition to scheduled collections, the group had cash and equivalent of Rs 1,452 crores and unutilised bank lines of Rs 250 crores. Further, asset-liability mismatch (ALM) statements of the key lending entities of the group did not show negative cumulative mismatches in the up to 1-year buckets, as on June 30, 2023.

Outlook:Stable

CRISIL Ratings believes the JM Financial group will maintain its healthy financial risk profile over the medium term, supported by strong capitalisation, conservative gearing, and healthy profitability.

Rating Sensitivity Factors

Upward factors

• Increase in scale and diversity of operations while substantially increasing the share of non-wholesale lending book at group level.
• Improvement in asset quality metrics and sustenance of earnings profile (RoA > 3.5%) on a steady state basis while diversifying the resource profile and thereby reducing the cost of borrowing.

 

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
• At a group level, with the current AUM mix i.e. wholesale constituting a substantial portion of AUM, weakening of capitalisation metrics with gearing inching beyond 3 times for an extended period of time; while the gearing in the retail book can be higher

About the Company

JMFSL, a 100% subsidiary of JMFL, is engaged in providing equity broking, investment advisory, wealth management (Elite), and distribution services to corporates, HNIs, and retail investors. It is also engaged in securities-based lending i.e. margin trade funding (MTF; approved by the Securities and Exchange Board of India, SEBI). JMFSL represents the Investment Advisory business of JM Financial Group and focusses on Investment Advisory businesses for non-institutional clients

About the Group

JM Financial is an integrated and diversified financial services group engaged in various capital markets related lending activities. The Group's primary businesses include (a) Investment bank which shall cater to Institutional, Corporate, Government and Ultra High Networth clients and includes investment bank, institutional equities and research, private equity funds, fixed income, private wealth management, PMS, syndication and finance; (b) Mortgage Lending includes both wholesale mortgage lending and retail mortgage lending (affordable home loans and secured MSME);  (c) Alternative and Distressed credit includes the asset reconstruction business and alternative credit funds; and (d) Platform AWS which shall provide an integrated investment platform to individual clients and includes elite and retail wealth management business, broking and mutual fund business.

 

As of March 31, 2023, the consolidated loan book stood at ~Rs 15,653 crore, distressed credit business AUM at ~Rs 13,558 crore, wealth management AUM at ~Rs 81,571 crore, and mutual fund QAAUM at ~ Rs 2,969 crore.

 

As of June 30, 2023, the consolidated loan book stood at ~Rs 15,891 crore, distressed credit business AUM at ~Rs 15,109 crore, wealth management AUM at ~Rs 84,827 crore, and mutual fund QAAUM at ~ Rs 3,154 crore.

 

The Group is headquartered in Mumbai and has a presence across 768 locations spread across 213 cities in India. The equity shares of JM Financial Limited are listed in India on the BSE and NSE.

Key Financial Indicators: JM Financial Limited (Consolidated)

Particulars	Unit	Jun-23	Mar-23	Mar-22	Mar-21	Mar-20
Total assets (net of goodwill on consolidation)	Rs. Cr.	30,002	29,318	25,762	23,462	20,693
Networth (including NCI and net of goodwill on consolidation)	Rs. Cr.	11,153	10,972	10,453	9,552	7,993
Loan book	Rs. Cr.	15,891	15,653	13,017	10,854	11,531
Total income	Rs. Cr.	1,081	3,343	3,763	3,227	3,454
Profit after tax (before NCI and after share of profit of associate)	Rs. Cr.	176	709	992	808	778
Reported Profit after tax (post NCI)	Rs. Cr.	166	597	773	590	545
Return on assets	%	2.4*	2.7	4.2	3.8	3.5
Return on networth	%	8.1*	7.6	10.6	9.2	10.2
Gross NPA	%	4.0	3.4	4.3	3.5	1.7
Net NPA	%	2.3	2.1	2.7	2	1.1
CRAR	%	35.8	38.5	39.4	40.2	38.7
Gearing	Times	1.5	1.5	1.2	1.3	1.5

NCI is Non-controlling interest

*annualised

ratios are CRISIL Ratings Calculated

NA is Not Available

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity  levels	Rating assigned with outlook
NA	Non Convertible Debentures^	NA	NA	NA	250	Simple	CRISIL AA/Stable
NA	Commercial Paper Programme	NA	NA	7-365 Days	2000	Simple	CRISIL A1+

^Yet to be issued