The Judo Capital Holdings Ltd (ASX: JDO) share price has soared 18% after the bank announced its FY24 first-half update.
This business operates Judo Bank, which focuses on providing services to small and medium enterprises (SMEs), offering business lending and term deposits to individuals, SMSFs and businesses.
FY24 first half update
In the six months to 31 December 2023, it’s expecting to report total income growth of 6.4% to $200 million compared to $188 million for the six months to June 2023. In other words, income rose by $12 million half on half.
Total expenses only rose by $5 million, or 5%, half on half. This helped the net profit before impairment improve by 8%, or $7 million, to $94 million.
Net profit before tax is expected to have improved by $13 million, or 24%, to $67 million.
Judo said it’s expecting profit before tax of between $40 million to $45 million in the second half of FY24, resulting in FY24 PBT of between $107 million to $112 million. Profit generation is normally key for the Judo share price, so these are promising numbers.
Analysis breakdown
The net interest margin (NIM) fell to 3.02%, down from 3.34% from June 2023. It continued to execute its term funding facility (TFF) (from the RBA) repayment strategy and held onto to an elevated level of ‘liquids’ over the half. $2.44 billion of TFF was drawn at December 2023, with $1.2 billion utilised to fund loans, and the balance invested in treasury securities.
But, the average gross lending margin on new lending for the December 2023 quarter was 4.64%, up from 3.98% in the September 2023 quarter and 3.90% in the June 2023 quarter. There has been no change to the bank’s credit risk settings.
Judo achieved net lending growth of around $800 million for the half, representing 3x system business credit (overall business lending in Australia) growth. It has reduced lending growth to sectors “susceptible to the changes in discretionary consumer expenditure and to weakening asset values.”
Overall profit before tax was ahead of what the market was expecting, thanks to “above-system lending growth, strong net interest margins, continued investment in growth, and minimal write-offs.”
Final thoughts on the Judo share price
It’s expecting to repay all of its TFF funding by June 2024, which will mean Judo’s funding costs will “normalise” and NIM will “continue to moderate” in the FY24 second half.
The second half NIM is expected to be between 2.7% to 2.8%, which is expected to be the low. It’s expecting an improvement after that driven by a return to normal liquidity levels, improving lending margins and a higher proportion of funding from lower-cost term deposits.
It’s targeting a lending book of between $10.5 billion to $10.7 billion by June 2024. Assuming economic conditions stabilise after FY24, it’s expecting lending growth to accelerate, so Judo is targeting profit growth of between 15% or higher in FY25.
The market has already reacted to this update and guidance, so the current price is taking the good news into account. Is it a buy? I don’t know the business that well, but if the economy remains as strong as it is, then Judo is probably an oversold opportunity, but there’s a danger these higher interest rates may cause problems.
