Judo Capital (ASX: JDO) Surges on 53% Profit Jump – Is the Challenger Bank a Buy?

Judo Capital Surges After 53% Profit Jump

Judo Capital Holdings (ASX: JDO) surged as much as 12 per cent on Tuesday after delivering its strongest half-year result since listing. The SME-focused challenger bank reported profit before tax of AUD 86.5 million, up 53 per cent on the same period last year, driven by a growing loan book and sharply improving efficiency. Management also upgraded guidance on both lending growth and margins, a clear sign that the leadership team sees further upside ahead. For investors who have been waiting for Judo to prove it can turn growth into real profitability, this result goes a long way towards answering that question.

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Judo’s Operating Leverage Story Finally Takes Shape

The headline profit numbers are impressive, but the real story here is what is happening beneath the surface. Judo Capital’s cost-to-income ratio fell to 48.5 per cent, down from 57.4 per cent a year ago. That is a massive improvement in just twelve months, and it means the bank is now earning more from every dollar of revenue than at any point in its history.

This is not only about cutting expenses. Costs did rise 11.9 per cent on the prior half as the bank added 10 new bankers and continued investing in technology, but revenue growth comfortably outpaced that spending. Judo’s bankers are working more efficiently and writing more loans each month than they were six months ago. The bank’s net interest margin held steady at 3.03 per cent, with management expecting it to lift to around 3.15 per cent in the second half as deposit costs improve.

What this tells us is that Judo Capital is reaching a point where growth feeds on itself. The loan book, now sitting at AUD 13.4 billion, is large enough that small improvements in efficiency flow straight through to the bottom line. Management has upgraded its lending guidance to AUD 14.4 to 14.7 billion for the full year and reaffirmed profit before tax guidance of AUD 180 to 190 million, implying an even stronger second half. We believe this is genuine operating leverage, not just a one-off beat.

Rising Bad Debts Need Watching

No result is perfect, and the one area investors should keep an eye on is credit quality. Overdue loans ticked higher to 2.66 per cent of the total book, up from 2.43 per cent in the prior half. Management explained that most of the increase came from a single customer in the childcare sector, rather than a broad deterioration across the portfolio.

That is somewhat reassuring, but SME lending is lumpy by nature. A handful of bad loans can move the needle quickly, and with the big four banks showing renewed interest in winning back SME customers, Judo Capital faces both credit risk and competitive pressure at the same time. The impairment charge of AUD 40.1 million looks manageable today, but this is a trend worth monitoring closely in the coming quarters.

The Investor’s Takeaway for Judo Capital

Judo’s return on equity climbed to 6.9 per cent, a solid step forward but still a long way from the low-to-mid teens target the bank has set at full scale. The stock does not pay a dividend yet, so the entire investment case rests on continued profit growth and eventual returns improvement.

Following Tuesday’s post-earnings rally to AUD 1.96, UBS has a buy rating with a target of AUD 2.20, while the pre-results analyst consensus sits near AUD 1.99 and is likely to be revised higher after the beat. In our view, Judo is one of the more interesting growth stories in the ASX banking space, but it is not cheap.

If management continues to deliver on operating leverage and ROE pushes into double digits, today’s price could look reasonable in hindsight. But if credit quality slips or big bank competition bites harder, a better entry point may come along. For growth-oriented investors comfortable with that risk, this result gives genuine reasons for optimism.