Judo Capital Holdings Ltd (ASX: JDO) released its FY25 results today, delivering another year of robust lending and earnings growth.
Judo Bank is an Australian challenger bank. The business focuses on lending to small and medium-sized enterprises (SMEs), particularly in sectors or regions where the big four banks have reduced their presence.
Judo Bank FY25 Results
Judo’s preferred earnings metric, profit before tax (PBT), increased 14% to $125.6 million, supported by increased lending activity and stable interest margins.
Statutory net profit after tax increased 24% to $86.4 million.
Judo credited its growth to the expanded distribution footprint, in addition to the onboarding of 17 new business bankers.
In total, Judo has 161 relationship bankers servicing 31 regions across Australia.
Judo aims to differentiate itself through a relationship banking model, whereby bankers service a smaller number of clients and specialise in a particular sector or geographic region.
On the earnings call, chief executive Chris Bayliss said regional lending would be a greater focus moving forward.
“With other banks continuing to exit regional markets to reduce costs, we still have a significant runway ahead of us. And the regions really do offer better margins, larger deals and higher NPS where our CVP [customer value proposition] is particularly compelling.” – Chris Bayliss, Judo Bank CEO
Deposits increased to $9.9 billion, supported by increased brand awareness of Judo’s competitive term deposit rates.
Management also announced it would launch an intermediated savings account ahead of a direct online savings account early next year.
Net interest margin (NIM), which refers to the difference between what Judo earns from its loans compared to the interest it pays for deposits, remained steady at 2.93%.
Management guided a NIM uptick of 3.0-3.1% in FY26, largely due to better funding costs and the expected benefit of the new savings accounts.
Customers typically accept a lower rate of interest compared to wholesale markets, and that’s why Judo (and other banks) try to attract depositors through term deposits and savings account deals.
Cost-to-income (CTI) fell to 52.4%, a slight improvement on the prior corresponding period. CTI is expected to fall under 50.0% in FY26 and to 30.0% in the long run.
Since CTI improvements have largely plateaued since 2023, I remain sceptical regarding the achievability of the 30% target.
Judo Bank Guides for Strong Growth in FY26
Judo guided for a meaningful increase to earnings in FY26, with PBT estimated between $180-$190 million. At the midpoint, that would represent PBT growth of 46% on FY25.
Since Judo delivered only modest improvements in NIM and CTI, earnings growth will rely on expanding the loan book.
This challenge is intensifying as Judo scales. Unlike the majors, which typically lend to households for 30 years, Judo’s business loans have a shorter duration and therefore require frequent replenishing.
The run-off rate for the June quarter was 26%. For Judo to maintain loan book parity, it would need to write $3.25 billion in new loans in FY26.
That’s not to say the business won’t achieve guidance, but investors need to be cognisant that replicating historic growth rates becomes more difficult each year.
Judo is also contending with heightened competition for loans, though management remains confident this will ease.
“We’re seeing a real lack of discipline in regards to pricing for risk. It’s not a strategy. It’s not sustainable. And if we fast forward 12 months out from here, I certainly think we’ll be in a different environment.” – Andrew Leslie, Judo CFO
The other major risk is credit quality. Impaired assets and 90+ days past due (90+ DPD) loans increased from 2.31% to 2.43% over the past year.
In total, the business incurred $38.7 million of write-offs, equal to 0.34% of its loan book.
Perhaps the most challenging and risky aspect of investing in this sector is that when things go wrong, they tend to unravel suddenly and with little warning.
Again, that’s not to say it will happen to Judo, but it does explain why the market and other investors remain cautious about the company.
Is the Judo Bank Share Price Cheap?
Based on the current share price of $1.72, Judo trades on an earnings multiple of 23.
Using FY26 PBT guidance and a 30% tax rate, Judo will earn $126 million after tax in FY26. This implies a forward price-to-earnings ratio of 15.5.
Compared to the likes of Commonwealth Bank (ASX: CBA), it appears cheap.
Data Source: CBA FY25 Results, JDO FY25 Presentation
However, the market discounts Judo because of its inferior scale and less creditworthy clientele.
Judo has a tiny fraction of the loan book and earnings that a large bank like CBA produces each year.
Moreover, the majors focus largely on low-risk residential mortgages with mostly recurring earnings, whereas Judo targets higher-risk and shorter-duration SME loans.
You can see that reflected in the higher gross write-offs between the two banks as well as the differing NIM profiles.
On that basis, it’s reasonable that Judo should trade at a lower multiple than CBA.
Would I Purchase Judo Bank Shares?
Today, Judo Bank is not a high-quality company.
Earnings need to be replenished consistently, while exposure to SMEs means it’s disproportionately linked to the economic cycle.
That appears to be reflected in the share price, and therein lies the opportunity.
Should Judo overcome the inherent challenges of small business lending, namely loan book attrition and credit risk, profits will be materially higher over a three to five-year horizon.
Expanding the relationship banking team will also differentiate Judo from more commoditised lenders.
The market may then be more willing to re-rate the business as its quality improves, with investors benefiting from both earnings growth and a multiple re-rate.
Judo Bank is on my watchlist, and I am considering taking a small initial position once our trading policy window permits (more than 2 days after the publication of this article).
While I do believe Judo Bank’s strategy makes sense and management will therefore be able to improve the quality of its business, I am nonetheless mindful that that is not guaranteed.
Read more results analysis from A Rich Life this reporting season by clicking here.
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Disclosure: The author of this article does not own shares in JDO and will not trade JDO shares for at least 2 days following the publication of this article. The editor of this article, Claude Walker, does not own shares in JDO and will not trade JDO shares for at least 48 hours following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 276544).