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Steady quarter led by NII beat; retail loans scaling well

PNB Housing Finance reported 4QFY23 PAT at INR2.79bn, ahead of our estimates of INR2.2Bn led by stronger than expected NII momentum (+57% YoY at INR5.8bn vs est of INR5.1bn). NIMs stood at 3.74% (with gross NIMs at 3.83%) for 4QFY23 given a strong pricing environment which is likely to persist in 1HFY24 as well. Almost entire disbursements in 4QFY23 came from the retail segment and grew 21.9% YoY (and 32.8% QoQ) to INR44.6bn. Management remains confident of delivering a 22-23% growth in retail disbursements and expect 17-18% AUM growth in the retail business with affordable housing loans forming 25-30% of overall disbursements mix eventually. Asset quality in retail segment remains steady (2.57% GNPA) though there remains room for improvement which should be visible over the next 6-8 qtrs in our view. We like PNBHF’s reinvigorated strategy of focusing on prime+affordable segments which along with ability to reduce cost of funds should drive sustainably healthy spreads in the medium term. Also, asset quality volatility should be meaningfully lower than PNBHF’s past cycle trends. We expect PNBHF to deliver 15% CAGR in AUMs over FY23-25 with avg ROAs of 1.8% while RoE uptick is likely to follow with higher leverage. We value the lender at 1x FY25E BV to arrive our TP of INR 625. Maintain BUY

* Strong retail disbursements momentum: In 4QFY23, retail disbursements were at INR 44.65bn (+32.8% QoQ/ +22% YoY) which formed almost entire disbursements for the quarter (wholesale disbursements were a meagre INR300mn). Individual housing loans formed 75% of the disbursements mix in FY23. Overall loan assets grew 10% YoY given the run down in the wholesale portfolio. As retail disbursements scale up (expect 22%+ YoY growth in FY24), we expect PNBHF to clock at 15% CAGR in AUMs over FY23-25. Growth will be led by both prime and affordable housing segments with the company intending to achieve a 75-25 mix between prime and affordable segment w.r.t. disbursements.

* Healthy operational performance: PPOP grew 32% YoY for PNBHF (though lower QoQ) given absence of one-off securitization gains in 3QFY23. NII declined by 5% QoQ given scale up in prime retail disbursements though NIMs were better than our expectations (3.74% for 4QFY23). Mgmt believes it can achieve a healthy spread of 2.5% (with NIMs sustainably 3.5%) given opportunity to reduce cost of funds eventually. PNBHF believes the prime segment offers lucrative yields of ~10% while the affordable segment yields are likely to be 12% sustainably and a healthy mix should aid PNBHF’s NIM profile.

* Corporate book now a small part; asset quality healthy: Wholesale book is now down 6% of PNBHF’s AUMs and the GNPA in the corporate segment (22.25% spread across 2 accounts) continued to decline. The retail business GNPAs stand 2.57% and management aspires to achieve 1.25-1.35% retail GNPAs over the medium term. GS3 coverage stood at 28.8% which we believe has room to improve going forward.

* Valuation and view : We forecast PNBHF to deliver 15% CAGR in AUMs over FY23-25 with average RoAs 1.85%. RoE uptick will follow up as it raises leverage from current evels. Also, asset quality volatility should be meaningfully lower than PNBHF’s past cycle trends given the focus on retail assets. We value PNBHF at 1x FY25E BV to arrive our TP of INR 625. Maintain BUY

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