JANA Small Finance Bank

Jana Small Finance Bank: [BSE: 544118] : NSE [JSFB].
CMP 433. FY 2024 Recorded PE at 6.8 times, Normalized PE of 11.75 (PE Looks Lower due to Deferred Tax Assets they have of approximately 801 crore at year end 2024.
Small Finance bank with big ambitions.
Jana Small Finance Bank has its DNA from Janalakshmi Financial Services (JFS) that got NBFC license in 2008. It was started by NGO to provide Microfinance loans to the needy. Later it transformed into Jana Small Finance Bank when RBI granted it a Small Finance Bank License. They listed their IPO in February 2024. JSFB is ranked as the fourth Largest Small finance bank in India.

Lets Do a SWOT Analysis of this bank -

Strengths:

  1. Pan India Presence with no concentration risk in geographies and wide coverage of around 776 Branches.
  2. Appealing product suite for Deposit and various attractive features like higher Interest Rates of upto 7.5% on saving account and upto 8.25% on Fixed Deposits. Monthly Interest credit for senior citizens and plans to introduce it to all customers.
  3. Seasoned and experienced Management.
  4. Unique Banking approach in asset side to be the core banker for all loan customer needs and anchoring towards affordable housing.
  5. Their deposit growth is more than 200 % of market growth in the last few years due to attractive Interest rates they offer.
  6. Higher Share of Secured book at 65% which was almost 0% in 2018.
  7. High Capital Adequacy of more than 20%.

Weakness:

  1. They have unsecured loan book of 35% of the portfolio which may perform very poorly during a bad business cycle as it has in past. This could result in higher Non-Performing Assets.
  2. High Cost of Deposits even though they are a bank. Cost of funds higher as they give higher Interest on savings and FDs.
  3. They cannot compete with bigger banks for Prime Loan customers and are not a truly core banking partner for deposit side customer.

Opportunities:

  1. JSFB is not even 0.15% of Indian Deposit and Advance size. Indian Banking is growing at 15% on loan side and 13% on deposit side. They can grow by more than market for many extended periods of time for more than 10 years if they play the moves right.
  2. Transitioning from unorganized lenders to organized lenders.
  3. Huge Interest Arbitrage (5% Monthly in Un-organized Sector) and Credit bureau data available for second time borrower.
  4. Moving from unsecured to Secured loans in Affordable Housing as anchor Product. From 0% secured loans in 2018 to 65% in Secured loans as on Q2-2025 and guidance towards 80% secured loans in next 3 years.
  5. Converting into a universal bank if they meet eligibility criteria in the next year. This could lead to lower cost of funds and greater confidence in garnering deposits.

Threats:

  1. Bigger banks with lower cost of funds can come to take their market like in Gold Loan, loan against Property, and take away most of the lucrative business by offering lower rates.
  2. Any external shocks like Covid19 or say demonetization or war like situation or Global Crisis like in 2008 may affect the unsecured side of book more than secured book and result in NPA rising more than the profits.
  3. A small bank may have higher attrition and may find it difficult to retain good talent.
  4. Bank being a highly regulated entity there is always a regulatory change risk.

What differentiates a “good bank” from a “not so good bank”, is its management and their vision, systems and practices, strategic positioning and technology.**

  1. Management – Mr Ajay Kanwal started his journey after completing his BE in Electronic and Telecommunication and MBA. He started his career with Citibank at various positions like CEO of Taiwan and South East Asia, TGP and Mastercard for short time. He was chairman of board at Standard Chartered bank Singapore and many sister companies. He brings in 32 years of industry experience in leadership positions and navigated JSFB after Demonetization.

He has also created a second line of Management that are Focused and have a very clear deliverable goals along with risk management in place. Talking with the staff at local branch suggest that Mr Ajay Kanwal Inspires confidence to the staff members and thay a very positive view towards management. They have a very clear and simple vision of becoming a financer to tier 2, 3 cities and rural areas, and Deposit generation from Metro, Tier 1 and 2.

  1. Systems and practice –The management is very system oriented rather than people focused, they spend time making the Minimum viable product in each segment and improving it over time as per inputs they get on ground. Eg If a loan is approved from all parameters line CIBIL Checks, Cash Flows, References, but if the visiting officer who verifies physically to borrower place is not convinced looking at the place the loan is rejected in tune of 10-12%. If there is a software glitch for onboarding it was rectified (Happened For my account Opening with them to test the product). These things are taken up by the top management personally.

  2. Strategic positioning – The bank has positioned itself as an anchor bank for loan customers by focusing secured affordable housing loans that yield higher Interest for the bank** at the same time they give on open loan limit upto 5 lakh on the same house itself like an LAP that can be availed by the borrower for business purposes with the same house as collateral. Similar way they give two wheeler loan to their affordable housing customer where there is dual collateralization of the two wheeler as well as home loan.

Eg If I take a Home loan of say 15 lakh and a bike loan of 80 thousand and my home loan is paid fully, I still won’t be getting property papers as my bike loan is still outstanding. Similar for say a SME loan or say a commercial vehicle. So this is a play on the biggest purchase of low income groups in affordable housing along with cross cauterization of various products that makes it a very secure play. They are now adding various untapped opportunities in a big way that have secured book along with good Net Interest Margin like a gold loan, Second hand cars, commercial vehicle. India’s Affordable housing sector is projected to grow faster than overall bank credit.


Here is a pictorial representation of average customer relationship Pre-Home360 (Home Loans as Anchor Product) and post Home360.

A)We can see a clear 32% rise in average customer relations like Saving account with loan, OD facility, Insurance, TD, Two wheeler loans etc.
B) 99% HOME360 customers have CASA accounts with bank as against 66% before.
C) Term Deposit and Recurring Deposit Penetration from Just 4% to 19%
D) Health Insurance for HOME360 Customers at 91% from just 32%
E) Pre-Approved business loan top up from 0% to 15.6%
F) Two-wheeler loan from 0.1% to 1%
G) Average Monthly Current account and Saving Account balances have grown from approximately 6500 Rupees to 27600 Rupees a growth of more than 320%.

  1. Technology – The biggest factor in today’s world is how well an entity uses technology as enabler and how can technology be used to get competitive advantage. On asking how will they compete with legacy banks that have very high technology budget and are very big, will this lead to cash burn just to keep up with older and much bigger banks. The management replied that they have technology built in all their processes right from account opening to servicing along with ever evolving systems and continuous improvement. They have an onboarding system where you can do account opening within 5 minutes and activation within 60 minutes if you have Adhaar linked OTP based account opening and 2 days if its offline process and all the documents are as per requirements. Almost all services that do not require direct personal verification can be done online. This has resulted in Debit card issuance as a proxy of Client addition from approximately in range of 38500 odd to range of 47000 each month.
  2. Operational parameters – JSFB has been able to gain market share on all the parameters like Debit Card issuances, Deposit Growth as well as credit growth YOY, along with growth in Deposit per branch when compared to all the other small finance banks as well as established and the market in general by a huge margin. Let’s Illustrate it with deposit growth Year on year for Q1 FY25.

The Industry Growth rate is 13.2%, Private bank growth rate is approximately 15.75%, PUS growth rate is 8.4% but JSFB Growth rate in deposits is 41% which is more than 300% more than market. Here they are gaining market share from overall banking industry as well as from the Established big Private banks and growing by more than 260% than a well-established private bank.
I am tracking Deposit growth because it is deposit growth that will drive Advance growth and advance growth is what will drive profitability growth. A strong deposit growth is sign that the customers are trusting the bank and bank is doing something right that people are choosing this bank than others. Last quarter HDFC, Kotak Mahindra bank, AU Small Finance bank, Axis bank, State bank of India, Bank of Baroda all have actually lost deposits (Negative Growth) than March quarter as against 5% deposit growth for JSFB.
I believe only banks with robust deposit growth will be able to grow and become leaders in growth in the next cycle whereas PSUs and larger Banks will lose market share to Likes of JSFB as they are offering various incentives like Higher Interest rates and monthly interest payment cycles, Bundled lifestyle benefits like golf courses, OTT subscriptions, SPA services, Pick up Facilities of cheque, locker facilities at discount and Zero fee banking that larger banks and PSU banks are not able to give or have lower service quality than JSFB of you hold same amount of deposit with them.
In the Table you can see how much difference is there between all the banks raw material (Deposit).

BANKS Deposit Growth YOY for Q1 FY25 Deposit Growth
JANA SMALL FINANCE BANK LTD 41%
SURYODAY SMALL FINANCE BANK LTD 42.20%
UJJIVAN SMALL FINANCE BANK LTD 22%
AU SMALL FINANCE BANK LTD – Ex Merger 25.17%
ESAF SMALL FINANCE BANK LTD 33.40%
UTKARSH SMALL FINANCE BANK LTD 30%
HDFC BANK – Ex Merger 16.9%
ICICI BANK 15.1%
KOTAK MAHINDRA BANK 15.54%
AXIS BANK 12.83%
STATA BANK OF INDIA 8.18%
PUNJAN NATIONAL BANK 8.5%
BANK OF BARODA 8.9%
BANKING INDUSTRY 13.2%

JSFB along with many small finance banks have a PE that is less than Nifty, Banking sector as well as private banks, Higher growth rate in profitability for next 3 to 5 years and available at cheap valuations along with high margin of safety on the downside

Key Triggers –

  1. Higher Growth rates than market in Deposits, Sales and profitability

  2. Cheaper valuations than Indian market, banking sector as well as private banks

  3. Converting into a universal bank after 1 year subject to eligibility criteria which they qualify and need to be qualified for 6 more months

  4. 750 Crores of additional capital will come for next 3 years as they have Deferred tax assets that they will receive so no Income tax for next three years

  5. One of the highest secured books in small finance banks at 65% and plan to raise to 80% in next 3 years thus reducing Risk in the book, increased stability and predictability in profits.

Disc - Holding in family account and can add or reduce any time.
Not a recommendation, for educational purposes only, consult your financial and investment advisor before investing.

1 Like

The entire MicroFinance sector is going through a stress period , JSFB - from the Latest quarterly report available shows that their Secured Loan Book @ 65% and They have slowed down the growth if unsecured book in H1 FY25.
Not enough results available to judge their lending practices or operational performance

Amansa Holdings (Akash Praksah ) and the Burmans bought into this which sparked my interest

They are geographically well diversified and their Loan portfolio looks decently diversified

Invested a small token amount for tracking

2 Likes

JSFB results were actually better than anticipated by the Markets.

  1. Net Profit after Tax Credits at 110.6 crores as against 96.7 crores QOQ and against 134.6 crores YOY. QOQ Profit after tax increased by 14.16% and reduced by 17.8% YOY.
  2. GNPA and NNPA reduced QOQ to 2.8% and 0.94% from 2.97% and 0.99% as against 2.19% and 0.71% year on year. Market was expecting an steep increase in NPAs due to Microfinance exposure but they have surprised by actually reduced GNPA and NNPA in microfinance and also lower Provisioning this quarter helping Profit after tax.
  3. Deposit Growth at 24.4% as against industry growth of 9.8% which is 249% more than industry thus taking market share in deposit growth.
  4. Share of Secured Assets at 68.2% as against 59.6% in March 2024. Significant growth of 8.4% in just 9 months.
  5. Reduction in preprovisioning operating profit at 279.1 crores as against 298.6 crores QOQ and 295.3 crores YOY.
    All in all mixed quarter YOY but a very strong quarter QOQ.
    Management commentary was very positive and expecting higher profits next quarter than current quarter with NPA controls.
1 Like

As per concall yesterday good times ahead…if they remove additional provision then 9 month profit is 586 crores and q4 being the strongest can easily cross 800 crores of profits (after removing additional provision)
And for fy26 there is no need for additional provision infact there will be some reversals of this provision plus they will grow atleast 20-25% so can easily see 1000 crores of profits next yr…infact they also have 700 plus crores of deferred tax asset so dont need to pay taxes…bank doing 1000 crores of profits available at around 4000-4500 crores of market cap

Many positives for next 1-2 yrs, Secured book growing, universal banking licence, credit cost reduction, dta.

In current market scenario everyone is avoiding banking and finance stocks due to microfinance issues but once everything stabilises most banking and finance stocks has much more room for upside then other sectors.

Disclosure invested and so my views may be biased

3 Likes

Rating agencies have recognized the efforts of management to de-risk their business and improve in a tough environment and upgraded it from A- to A stable.
Jana Credit Rating upgrade.pdf (1.2 MB)

Reached out to management with an email seeking clarification on, resulted in a quick telephonic discussion.


Queries

In the Analyst call for FY 2023-24, conducted on 30 Apr 2024, in response to an analyst’s query about having a high credit to deposit ratio (around 102% at that time) which stands similar currently (Q3FY25), our MD/CEO Mr. Ajay Kanwal had explained thoroughly that the bank has option to either reduce the credit-deposit ratio by bringing up the deposits which are relatively more expensive and of shorter tenure (relative to the alternative) as compared to the refinance facility that the bank has from SIDBI, NABARD, NHB against the assets assigned to those institutions.

  • Given where the rates are today and the refinance borrowing cost from SIDBI, NHB, NABARD - does this explanation stand true for the currently maintained CD ratio?
  • Additionally, given we recently took measures to reduce our deposit cost (as a result of which our CASA ratio went down to 18-odd%), would we be thinking something similar, i.e reducing our FD rates - which would mean our own cost of deposits would be similar or lower than the borrowings from SIDBI, NHB or NABARD and hence they would start to make economic sense to move towards deposits from borrowings?

An additional assumption on the above point is we would use our levers of deposit interest rates carefully to ensure our ALM does not get disturbed and we raise deposits for tenures accordingly.


And, the Karnataka MFI situation and how are things evolving there given govt has been concretising their move towards an ordinance, talks of developing online portal to track loans and so on.


Management’s response:

Regarding CD Ratio:

  • Yes the management is thinking in similar lines, they do present numbers to regulator as well with and without refinance (from NHB, NABARD, SIDBI) included and the regulator is aware of the same.
  • Also management has the targets to bring up the CD ratio to 30-odd% in next 18-24 months. But that said, yes currently borrowing from SIDBI, NHB, NABARD is almost at similar levels as our Term Deposit rates but since we have the ALM comfort there - long term borrowings - we are on it as of now. As interest rates progress, and if our FD interest rates come down significantly, we will be looking at building up CASA ratio.

When I queried if they have had a chance to explain this approach to regulator and how has the response / feedback been from them given we are prepping for Universal Bank license in near future. The response was again quite positive that ofcourse they and others in the industry present numbers to the regulator with and without refinance component and regulator is also aware of the same. Although the official way is to calculate only deposits / all advances, they do take into consideration both the numbers.

Regarding MFI scenario

  • A few years ago we decided to move away from JLG to a large extent. We are mostly into individual loans and into deeper rural as opposed to urban / semi-urban setting where the concerns are largely present.

When I followed up if MFI situation doesn’t bother us that much - the response was that it is not that it doesn’t bother is, it is hard work to keep credit culture in tact and because we are working with indiividual loans - they are more aware of their credit standing.

Lastly, they also mentioned that they are very strict with the teams on ground regarding collections and not doing anything that is unruly or illegal in nature that can create concerns.


So overall, very positive, detailed, thoughtful responses and seems much good times ahead (I mean longer term - at least 5-7 year horizon, less than 5 years, ofcourse things can happen and prices can be very volatile).

Disclosure: Individual Investor, biased, given the valuation comfort, superb experienced management, very thoughtful, thorough approach towards banking and the background of Mr. Ramesh Ramanathan who is still their Non Independent Non Exec Chairman, I am just buying by bucket load. Not a recommendation, please do your homework.

PS: I also asked a numbers query from their BASEL II PILLAR III disclosure for Sept 2024 quarter, but very quickly realised that I had made a mistake there. They handled my acceptance of mistake very gracefully.

4 Likes

I think high interest rates will get you deposits till a point. After that its service and customer franchise and stickiness factors that will make people put higher deposits here. I think thats where they lack to a certain extent in terms of products for retail like ASBA, App UI and UX, UPI one has to have different app, UPI app not working properly, QR code generation and Sound box facilities, Investment, insurance and fixed deposits all at one place, Monthly interest even for other Saving accounts not just Senior citizens saving account. They need to up their game for retail as they are lacking there after experiencing almost 7-8 months of their premium account that is the EXCLUSIVE account. I like their liquid plus money which i think is good but very short term money that may or may not be there next time. I would like to see some current account Sweep FD kind of concept for smaller tick sizes so more quantity of CASA comes along.
All in all I think what they have done good for the size they are but they wouldn’t be first choice for many as they lack the entire suite for a saving client or a Corporate client, where the chunk of low cost money and cross sell capacity for non interest income is there.
Need to see how the management addresses this challenge for being a customer franchise than just a high interest bank.

2 Likes

Good to hear this. I am in the process of getting Jana regular account (not exclusive - to get a feel for what average user experience feels like). Do you mind sending this via email to their investor relations team and request them to redirect this to their products team.