Judo Capital's FY25 Outperformance and FY26 Growth Levers: A High-Conviction Buy for Capital Appreciation

In the fiercely competitive SME banking sector of 2025, Judo Capital Holdings Ltd (ASX: JDO) has emerged as a standout performer, leveraging a trifecta of strategic advantages: robust net interest margin (NIM) expansion, disciplined cost control, and aggressive deposit growth. These levers have not only driven FY25 outperformance but also positioned the bank to unlock superior return on equity (ROE) and capital efficiency in FY26. For investors seeking exposure to a high-conviction growth story in the SME space, Judo's execution model and forward-looking guidance make it an compelling case for capital appreciation.

NIM Expansion: A Structural Tailwind

Judo's FY25 NIM of 2.93%—with a second-half surge to 3.04%—exceeds sector expectations, which project industry-wide NIMs to stabilize around 3% by year-end. This outperformance stems from proactive portfolio management and favorable lending margins, particularly in its SME-focused loan book. Unlike peers constrained by rising deposit costs (3.15% as of Q2 2024), Judo has diversified its funding mix through new high-interest savings accounts and term deposits, reducing reliance on costly wholesale borrowing.

The bank's ability to maintain NIM above 3% in FY26, as guided by management, hinges on its strategic shift to a cloud-based core banking platform and enhanced treasury management. These investments not only streamline operations but also enable dynamic pricing models, allowing Judo to capture spreads in a low-rate environment where competitors struggle. For context, the broader SME sector faces margin compression due to high deposit betas and limited pricing power, making Judo's NIM resilience a critical differentiator.

Disciplined Cost Control: A Path to Profitability

Judo's cost-to-income (CTI) ratio of 52.4% for FY25—down from 55% in FY24—reflects its operational efficiency, with the second half of the year seeing CTI dip below 50%. This improvement is driven by a lean cost structure and targeted investments in automation, such as AI-powered risk modeling and digital customer engagement tools. By contrast, many SME banks are grappling with rising costs from talent retention, technology upgrades, and regulatory compliance under Basel III.

Management anticipates CTI to remain stable in FY26, with operating expenses growing at a mid-single-digit rate. This disciplined approach to cost management is pivotal for scaling ROE, which rose 80 bps to 5.3% in FY25. With a clear roadmap to achieve at-scale ROE in the low-to-mid teens, Judo's efficiency gains are not just defensive but growth-oriented, enabling reinvestment in high-return initiatives like regional expansion and product innovation.

Deposit Growth: Fueling Capital Efficiency

Judo's deposit book, now exceeding $9.9 billion (a 20% year-on-year increase), is a cornerstone of its capital-efficient model. By prioritizing direct retail channels and high-net-promoter-score (NPS) lending services (+53), the bank has cultivated a loyal customer base willing to fund its growth organically. This contrasts with peers reliant on volatile wholesale markets, where rising interest rates have spiked funding costs.

The launch of a new high-interest savings account further diversifies Judo's deposit mix, reducing duration risk and enhancing NIM. With deposits projected to account for 75% of at-scale funding, Judo's ability to secure low-cost capital at scale is a structural advantage. This is particularly relevant in a sector where deposit betas remain high for midsize banks, forcing them to compete on price rather than service.

Strategic Positioning: Technology and Culture as Competitive Moats

Judo's migration to a cloud-based platform—powered by Backbase, nCino, and Salesforce—has created a scalable infrastructure capable of supporting rapid growth. This technological edge, combined with a culture of judgment-based lending and team-centric incentives (e.g., the Judo Belt Scheme), fosters agility and customer trust. The bank's “JEDI” index, which tracks employee engagement, underscores its commitment to a values-driven culture, a rare asset in an industry often plagued by short-termism.

FY26 Outlook: A Catalyst-Driven Growth Story

Judo's FY26 guidance—$12.4–12.6 billion in gross loans and advances, 15% PBT growth, and ROE in the low-to-mid teens—is underpinned by three key catalysts:
1. Operating leverage: Cost discipline and technology-driven efficiencies will amplify margins as the bank scales.
2. Regional expansion: 31 locations by June 2025 will deepen its SME footprint, capturing unmet lending demand.
3. Deposit innovation: The Thought Machine core platform will enable tailored products, further reducing funding costs.

Investment Thesis: A High-Conviction Buy

Judo's combination of NIM resilience, cost efficiency, and deposit-led capital generation positions it to outperform in a sector facing margin pressures and regulatory headwinds. At a forward P/E of 12x (as of August 2025), the stock trades at a discount to its peers, reflecting undervaluation of its growth potential. For investors with a 12–18 month horizon, Judo offers a compelling risk-reward profile: disciplined execution, a clear path to ROE expansion, and a scalable model in a $100 billion Australian SME market.

In a world where SME banking is increasingly a battleground for capital efficiency and customer loyalty, Judo Capital has not just adapted—it has redefined the rules. The time to act is now.