Banking & Financials: Jio Financial Services: Decoding the unknown

21 Aug 2023 , 10:36 AM

Jio Financial Services (JFS) will be entering four businesses: 1) Retail lending 2) AMC 3) Insurance (Life, Non-life and Broking) 4) Digital payments. Analysts of IIFL Securities estimate JFS’s lendable net worth to be $2.7bn (19% of consol. reported), and expect it to initially target consumer durable, unsecured PL and smallticket merchant loans. They expect gradual scale-up (save for any acquisitions), as it builds out physical and collections infra (29 employees currently vs peers having 800-4k branches and 4-66k employees). Over the medium term, analysts of IIFL Securities expect JFS to add larger ticket size and secured consumer, merchant and MSME loans. Out of the $870bn total retail and SME lending, the market size of these segments is $200bn. Analysts of IIFL Securities do not expect JFS to focus on mortgages over the medium term. Given the relative under penetration, JFS’s entry may not be disruptive for other players’ growth prospects. But, it can potentially dilute the high profitability of these segments, if JFS competes on pricing. Their scenario analysis indicates JFS valuation of Rs200-320/share ($15-25bn). 

What businesses is JFS going to enter? 

JFS’s information memorandum lays out four key businesses that the company intends to target: 1) Retail lending 2) Asset management 3) Insurance broking 4) Digital payments. Apart from these, analysts of IIFL Securities channel checks indicate that the company is also seriously considering entering the Insurance business. Within lending, JFS has identified three focus segments: 1) Consumer durable lending 2) Merchant lending (including personal loans, secured and unsecured) 3) MSME lending (working capital and small-ticket business loans). JFS will leverage distribution strength (physical and digital such as MyJio app, etc.) of telecom and retail ventures of RIL to scale these segments. Its digital payments offering (payments aggregator) is likely to be a hook for small merchant acquisition, in analysts of IIFL securities view. In asset management, JFS has formed JV with Blackrock to offer lowcost investment solutions (passive funds). Besides these, JFS also houses Jio Payments bank (JV) and account aggregator businesses. Analysts of IIFL Securities note that payments bank lack an independent business case, given the regulatory restrictions limiting the scope of permissible businesses. Whereas, the business model for account aggregator is yet to evolve (no data advantage, given the regulatory restriction on AAs with regard to customer data). 

Will JFS disrupt the lending landscape with its $14bn net worth?

JFS’s lendable net worth is likely to be ~19% of its reported consol. net worth of Rs1.15trn, once the cost of 6.1% RIL stake is deducted (in excess of 10% of adj. net worth. A meaningful portion of this is likely to be used to seed non-lending financial businesses. Of course, the monetisation of this stake would be lendable net worth accretive. 

Initially, analysts of IIFL Securities expect JFS to target consumer durable loans, unsecured personal and small-ticket merchant loans by leveraging Reliance Retail and Jio Telecom’s physical and digital distribution channels. They expect the scale-up to be gradual (save for any acquisitions) as it builds out physical and collections infra (currently JFS has only 29 employees) - peers have 800-4K branches and 4-66K employees. FinTech lenders that typically lack physical and collections infra have AQ challenges, which are reflected not only in higher delinquencies but also materially lower roll-back rates. Over the medium term, analysts of IIFL Securities expect JFS to add larger ticket size and secured consumer, merchant and MSME loans. These segments have a market size of Rs17trn, out of the Rs71trn of total retail and SME lending. 

JFS’s entry in these segments may not be disruptive on growth for other lenders, given the relative underpenetration of retail lending in India. But, it can dilute the high profitability of these segments if it competes on pricing. Further, analysts of IIFL Securities believe that competition through any form of predatory offerings is unlikely, given that: 1) Its funding cost is not materially different from BAF’s (6.7% for CPs, like for like) and is in fact ~200bps higher than top Private banks / SBI. 2) Highly regulated nature of lending business.