On Wednesday, UBS initiated coverage on Judo Capital Holdings (JDO:AU) stock, a firm operating within the competitive banking sector, with a Buy rating and a price target of AUD2.10. UBS highlighted Judo's successful establishment of a niche in the market despite the dominance of major banking institutions.
The firm's potential for growth is seen as being supported by structural factors in the business banking market, which is expected to see a 9.8% compound annual growth rate (CAGR) over five years in the small and medium-sized enterprise (SME) segment.
UBS projects that Judo's lending book could double to approximately $20 billion within the next four years, based on conservative estimates. These projections show a 15% three-year CAGR in lending for Judo, slightly below the 17% forecast by Visible Alpha. The expansion is anticipated to be driven in part by increased penetration in the commercial broker channel, which currently stands at 30%.
The landscape for Judo Capital has evolved significantly since the company went public in 2021. Key changes include the replacement of term funding facilities, an increase in interest rates by 4.25%, and the implications these factors have on the credit cycle and funding costs. Additionally, the competitive environment in business banking has intensified.
UBS's analysis suggests that while business lending is a higher-margin segment—over 60 basis points above retail—it is also expected to face increased capital allocation that could reduce return on invested capital (ROIC). Despite these challenges, the firm's outlook for Judo Capital remains positive as reflected in the Buy rating.
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