Judo Capital Adds New Avenues For Growth

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Judo Capital has reaffirmed its FY25 and FY26 profit growth guidance, easing investor concerns around the sustainability of its earnings trajectory.

-Judo Capital reaffirms FY25 and FY26 profit growth guidance
-Strong loan growth and an improving net interest margin
-Citi sees new opportunities to improve metrics-at-scale targets
-Details of new warehouse lending product 

By Mark Woodruff 

Listed on the ASX since November 2021, specialist pure-play lender Judo Capital ((JDO)) remains Australia’s first and only purpose-built challenger bank focused exclusively on small and medium enterprises (SMEs).

In early May, management lowered its guidance for gross loans and advances (GLA) to $12.4-12.6bn, from $12.7-13.0bn, in response to softer lending activity during the March quarter.

Macquarie notes concerns around achieving FY25 targets were eased at last week’s 2025 investor day, where Judo management confirmed the loan book had reached $12bn as of June 2.

The $270m increase since April led Citi to suggest seasonal lending patterns are normalising and revised FY25 GLA guidance appears attainable.

Management maintained FY25 profit (PBT) growth of 15%, along with 50% growth for FY26 (which highlights emerging operating leverage) assuming stable economic conditions.

Based on reaffirmed guidance, Macquarie concludes the business is executing well given the strong loan book growth in May.

The challenger bank also reaffirmed second half net interest margin (NIM) guidance, at the upper end of the 2.90-3.00% range, with an exit NIM at June 30 of 3.00%.

The combination of strong loan growth and an improving NIM helps drive growth in revenue faster than costs, which forms an important part of Morgans’ investment thesis for Judo Capital.

As a result, this broker now has increased confidence in the strength of Judo’s management, business model, and earnings growth outlook.

Encouragingly, management still expects book growth to pick back up after a period when a higher-than-usual proportion of loans were repaid or left the bank’s loan book, also termed as book run-off.

Both near-term guidance and long-term metrics at scale were reiterated, albeit with further colour provided around near-term performance and strategy.

One of the at-scale targets is for low-to-mid teen return on equity (ROE) at $15-20bn gross loan book size.

Citi reports management demonstrated increased confidence in loan growth, highlighting repricing of term deposits following the latest interest rate cut has helped restore spreads to target ranges.

This outcome also gives Macquarie greater comfort around near-term margins and earnings.

Other opportunities

New deposit products offer an opportunity to lower overall funding costs and potentially improve upon current metrics at scale, explains Citi. Hence, Judo is diversifying into other opportunities by taking advantage of its larger presence.

The product offering is expanded with the aim of doubling Judo’s deposit total addressable market (TAM). The plan is to launch both business and retail savings products, beginning with business towards the end of FY26.

Apart from expansion in agriculture and regional, other growth opportunities arise from new warehousing facilities (an around $1bn pipeline). A new warehouse lending product is being offered to non-bank lenders, which is NIM dilutive but expands the total addressable market, notes Morgans, and is return on equity (ROE) accretive i.e. less capital-intensive.

Judo has revised its estimated TAM for SME lending to $814bn, an increase of $209bn since its last assessment in 2021, due to an overall increase in credit availability. UBS explains the bank’s expansion into agribusiness lending also added $39bn, and warehouse lending contributed $34bn.

The bank’s new warehouse lending product is a facility specifically designed to provide funding to SME-focused non-bank financial institutions (NBFIs). This product allows these institutions to access tailored warehouse funding lines from Judo, supporting their own lending to small and medium-sized businesses.

Management also intends to introduce online business savings accounts that are expected to be lower cost than term deposits and further diversify the bank’s funding mix. High-interest online savings accounts for retail customers will also be introduced, providing Judo an option to compete in a different deposit market when favourable.

Interestingly, Judo offers employees a unique remuneration framework to deliver a core customer value proposition (CVP), which is built around a relationship-based, judgment-driven approach to SME banking. This results in a high level of engagement among Judo’s business bankers.

According to Judo management, the combination of remuneration and engagement provides a competitive edge during a period of heightened business banking competition.

Some caution

As gross loans and advances are run rating at around -3% below the consensus forecast for FY25, UBS cautions this leaves Judo one month to grow lending by circa $400m (or 3%) to the lower range ($12.4bn) of FY25 guidance. Ominously, the last time lending grew close to this volume was in May/June 2024, points out the broker.

By way of explanation, Jarden suggests management, in the current uncertain macroeconomic environment, has prioritised NIM and asset quality over volume.

While management expressed confidence in delivering $2-3bn in gross loan growth annually over the next two to three years, Ord Minnett highlights flat growth over the past six months or so, even allowing for the seasonality factors in business lending.

Management blames this lack of book growth on the run-off of now uneconomic covid-period loans which were largely funded by the Reserve Bank’s term funding facility (TFF).

Improving costs

Judo now also expects its FY25 cost-to-income (CTI) ratio will be lower thanks to tight expense control.

With major investments in core system/operations completed in FY25, cost growth in FY26 is expected to be a function of wage inflation, intangible amortisation and other growth initiatives.

Outlook

While Judo Capital represents higher risk than the major banks in Australia (given its specialty in SME business banking), Morgans predicts capital appreciation (no dividends are paid) will be driven by “stellar” earnings growth across FY26-27 in particular. It is believed the share price could reach around $2.65 by the end of the decade.

There are six daily covered brokers in the FNArena database conducting research on Judo Capital including four Buys, or equivalent, while Morgans has downgraded to Accumulate from Buy, and Citi maintains a Hold rating.

The average target price of $1.93 implies 26.4% upside to yesterday’s closing share price of $1.53.

Outside of daily coverage, Jarden is Buy-rated with a $2.40 target price.

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