PNB Housing Finance - Stress persists; business transformation gives ray of hope - ICICI Securities

PNB Housing (PNBHF) reported PAT of Rs2.3bn (down 2% YoY / 26% QoQ) due to elevated credit cost and modest NII growth. Proforma GNPA witnessed an anticipated spike to 4.5% vs 3.0% QoQ, hence vulnerability of the company's balance sheet to incremental stress remains a cause of concern. Rightly so, given that 79% of the corporate book is performing well and 62% of overall corporate book is zero DPD. We therefore expect proforma stage-3 assets to rise to 6.5% and credit cost to continue at ~120bps each year over FY21E/FY22E. On aligning with its new strategy, PNBHF is focused on undergoing business transformation wherein it will target mass housing and the lower risk-weighted retail segment. This will moderate the revenue growth, though risk-adjusted return would be better over the medium term. With anticipated RoE of sub-10% and muted AUM growth, valuation rerating will be capped. Maintain HOLD with a target price of Rs360. Key risks: 1) faster than anticipated resolution of the corporate book, and 2) change in credit rating outlook post proposed equity raise.

- Corporate book - not out of the woods yet: Currently, 55% of the corporate book (17% of AUM) comprises under-construction projects, 62% is zero DPD and 79% is performing well. This implies that soft bucket resolutions are close to pre-Covid levels; collection/resolution efforts are underway for the balance (where various alternatives are evaluated - be it Swamih funds for three projects, or joint development agreements with other developers). However, delay in resolutions would expose PNBHF to the risk of further slippages or higher credit cost. It has a provision buffer of 11% on the overall corporate book and 56% on its corporate stage-3 assets Restructuring stood at Rs8bn (1.25% of advances) wherein it was split 83:17 retail:corporate. From the current proforma stage-3 of 4.5%, we expect it to touch 6.5% by FY22E and are therefore building-in credit cost of ~122bps for FY21E/FY22E.

- Corporate book consolidation and deleveraging to keep AUM growth modest; go retail: PNBHF is down-selling and deleveraging its corporate book - down 14% YoY. Infact, the Covid pandemic has impacted retail disbursements as well in the interim (retail advances down 6% YTD). Encouraging logins, sanctions and disbursements are gaining traction reporting >10% growth over pre-Covid levels. Company has articulated a strategy of focusing on mass housing and the high-yielding (Unnati) retail segment. Retail segment constitutes 97% of incremental disbursements YTD and, within retail too, the focus is on individual home loans (68% of disbursements). Key will be to manage the drag from balance transfer (out) given competition intensity in individual home loans. We expect AUM de-growth of 6% for FY21E and growth of 2-7% for FY22E/FY23E.

- NIMs normalise at 3.18% in absence of large securitisation gains: Steady decline in borrowing cost (30bps QoQ/50bps YoY) aided spreads to sustain at 2.7%. This was further supported by securitisation income to the tune of 19bps in Q3FY21 (>60bps in Q2FY21). With rising proportion of retail mix, we expect spreads of 210-230bps. Over the past couple of quarters, PNBHF has reduced its retail lending rates by 65bps and the gap with peers has narrowed to 25-40bps. NHB refinancing now constitutes more than 10% of borrowings, which further aids funding cost.

Shares of PNB Housing Finance Ltd was last trading in BSE at Rs.340.95 as compared to the previous close of Rs. 353.25. The total number of shares traded during the day was 42179 in over 1815 trades.

The stock hit an intraday high of Rs. 345 and intraday low of 325.25. The net turnover during the day was Rs. 14259749.

Source : Equity Bulls

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