In October 2022, PNB Housing Finance's gross non-performing assets (NPAs), the percentage of loans unpaid for more than 90 days, stood at 6.35%. Today, it has dropped to just 1.1%. Since FY23, the company’s profit after tax (PAT) has nearly doubled, from Rs 1,050 crore to Rs 1,950 crore. Its price-to-book ratio has improved from 1x in March 2023 to 1.5x currently, and the stock is up nearly 3x in three years. So what’s driving the underlying business, and can it sustain the momentum? Let’s take a closer look. The pre-2022 landscape PNB Housing Finance was one of the casualties of the 2017 housing boom and the subsequent crisis. Backed by Punjab National Bank and global investment firm Carlyle, PNB Housing’s loan book grew from Rs 27,200 crore to Rs 62,250 crore between FY16 and FY18. Then came the IL & FS crisis. PNB Housing Finance’s NPAs began to swell primarily due to rising stress in its wholesale loan book, especially from exposure to real estate developers. Following the IL&FS crisis in September 2018, liquidity dried up for NBFCs, triggering a funding squeeze and defaults in the real estate sector. As of FY18, the company’s gross NPA stood at just 0.33%, but it surged to 2.75% by FY21, with most of the slippage coming from the corporate/wholesale segment, which constituted over 20% of the loan book at its peak. NPAs further increased to 7.6% in March 2022. However, not all was as bad as it looked. In FY22, credit cost from the retail segment, which constituted about 80% of the loan book, was 2%, and from the corporate segment (real estate developers) was 21%. This meant that 20% of the loan book was 100% of the problem. Post-2022 October 2022 marked a turning point. First, a new CEO took charge. Second, Carlyle’s attempted takeover failed. It tried to infuse preferential capital of Rs 4,000 crore in 2021 and raise its stake to over 50%. It tried to do so at a throwaway valuation (P/B ratio of ~1.1 or at an implied valuation of Rs 16,500 crore) without an independent valuation report. The deal was eventually called off because Stakeholder Empowerment Services (SES), a proxy advisory service, cried foul play. SEBI took note and put the deal on hold. In April 2023, the company raised Rs 2,400 crore through a rights issue to existing shareholders and got the capital it needed to grow its loan book. Third, write-backs from earlier written-off loans plus higher disbursement growth led to PNB Housing’s Goldilocks period. PNB Housing Finance: Today and tomorrow Faced with an identity crisis as a prime-only housing finance company (HFC) with little room for growth, PNB Housing, much like its large HFC peers, has set its focus on growing in the affordable housing finance space. Over the last four quarters, disbursements towards ‘affordable’ segments have picked up, reflecting the strategic growth direction for the business. The affordable housing segment, which started in January 2023, is now 9% of the total loan book with outstanding loans of Rs 5,000 crore and a target of Rs 9,500 crore for FY26. But why is PNB Housing Finance aggressively focusing on this segment? This new segment serves a simple purpose — higher yields and growth prospects. According to the management, this segment not only offers room for growth but also higher yields. In a rate-cut environment, HFCs tend to see moderation in yields. By growing a higher yielding segment, such as affordable housing finance, PNB Housing is hoping to expand Net Interest Margins (NIMs) in a reducing repo rate environment. This is a big ask. According to Subha Sri Narayanan, Director, Crisil Ratings: “HFCs are likely to witness NIM compression because while 98% of mortgages are floating-rate linked, only about 45% of liabilities are floating-rate liabilities.” This means asset (loan) yields are likely to reduce faster than liabilities, putting a downward pressure on NIMs. Affordable housing, on the other hand, is likely to hold up much better owing to higher yields and because the liability profile of affordable HFCs consists largely of bank and NHB funding, which takes longer to get transmitted in a falling interest rate scenario. Write-backs to continue for another few quarters There’s another reason why growing the affordable segment is key to PNB Housing’s future. We mentioned earlier that PAT growth has outstripped Net Interest Income growth. This is primarily owing to write-backs. Valuation So, where does PNB Housing Finance lie on the valuation spectrum? It’s not as ‘expensive’ as Bajaj Housing Finance nor as ‘cheap’ as Repco Home Finance. It lies somewhere in the middle. Based on the strong PAT growth, the company has been a prime candidate for re-rating: from a P/B ratio of 0.4x during the March 2020 dip to 0.8x during the July 2022 dip to 1.6x today. Whether it can re-rate further will depend on how consistently it can continue improving Return on Equity (ROE) and keep growing the affordable housing finance book without creating asset quality issues. However, investors should factor in the time horizon and take note of the challenges that may come up in the form of lagged NPAs from the affordable housing book. Note: We have relied on data from www.Screener.in and www.tijorifinance.com throughout this article. Only in cases where the data was not available have we used an alternate, but widely used and accepted source of information. Rahul Rao has helped conduct financial literacy programmes for over 1,50,000 investors. He also worked at an AIF, focusing on small and mid-cap opportunities. Disclosure: The writer or his dependents do not hold shares in the securities/stocks/bonds discussed in the article. The website managers, its employee(s), and contributors/writers/authors of articles have or may have an outstanding buy or sell position or holding in the securities, options on securities or other related investments of issuers and/or companies discussed therein. The content of the articles and the interpretation of data are solely the personal views of the contributors/ writers Investors must make their own investment decisions based on their specific objectives, resources and only after consulting such independent advisors as may be necessary.
