The jury's still out on the outlook for the big four ASX banks, but there's one alternative ASX share that might be looking too cheap to ignore, according to a leading broker.
The bank share in question is the Judo Capital Holdings Ltd (ASX: JDO) share price. It jumped 2.3% to $1.33 in morning trade after Citigroup reiterated its buy call ahead of Judo's results.
This could explain why the alternative bank share is outperforming the big boys at the time of writing.
The ASX bank share that got the chop
The National Australia Bank Ltd (ASX: NAB) and Commonwealth Bank of Australia (ASX: CBA) shares are relatively flat. The Australia and New Zealand Banking Group Ltd (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) shares have dipped into the red.
But the outperformance of the Judo share price may not be that surprising. The shares have tumbled over 40% the past year, which is worse than its larger counterparts.
Citigroup reckons the underperformance is unjustified and it said:
At time of listing in October 2021, we expect few would have foreseen an acceleration in business credit growth from ~5% to ~13%; nor would many have forecast a cash rate of 1.85% at the time of result.
Despite the dramatic shift in the macro, we expect JDO to deliver on financial expectations set at the time of IPO.
What to expect in Judo's full year results
The broker is forecasting cash earnings of around $8 million. It also noted that data from the Australian Prudential Regulation Authority (APRA) shows Judo may have hit its goal of building a $6 billion loan book as of 30 June 2022.
But results are backward looking. What will be key is management's outlook during these volatile times.
Some of the things Citi is paying close attention to is Judo's forward-looking statements on SME credit. Investors also will be keen to hear about Judo's ability to fund growth and protect its net interest margin (NIM). This is an issue for all ASX bank shares because of rising interest rates and bond yields.
The higher rates and predictions of a slowing economy will also make credit quality another sensitive area. Loan defaults could rise materially if conditions worsen.
What is the Judo share price worth?
Citigroup added:
With little earnings currently, the long-term premise for JDO is its ability to reach medium term targets at scale.
After a solid 12 months of executing on plan, JDO management will need to articulate how it can maintain its medium term aspirations in a deteriorating macro environment.
But delivering to expectations may be all that's needed for the Judo share price to rebound. After all, there is arguably little good news in its shares at current levels – not when it's trading on around 1 times book value.
Citi's 12-month price target on the Judo share price is $1.90. This implies a 40% plus upside for the alternative ASX bank share. Judo will hand in its FY22 earnings report card on 25 August.
