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RoA at >2% driven by NIM expansion and credit cost normalisation

PNB Housing Finance’s (PNBHF) Q1FY24 financial performance was an outcome of the new management’s renewed focus on ‘retailisation’ as reflected in 99% of total disbursements towards retail segment (INR 37bn, of which INR 2.2bn was towards affordable housing) and steady decline in corporate book to INR 34bn (down 10% QoQ). Corporate book now constitutes only ~6% of total AUM. Further, PNBHF continues to make investments in affordable housing business – total branch count stands at 88 as on Jun’23, covering 150+ districts. Contrary to expectation, NIM expanded 12bps QoQ, benefiting from fresh capital raise of INR 25bn in May’23. Considering PNBHF’s better performance in a seasonally weak quarter and management’s confident of delivering 15-17% YoY AUM growth in FY24, we increase our earnings estimate by 5% in FY24E and 3% in FY25E.

Earnings at INR 3.5bn (up 24% QoQ), driven by 12bps QoQ NIM expansion and credit cost moderating to 40bps

In a seasonally weak quarter (Q1), PNBHF sustained improving trajectory in earnings as reflected in 24% QoQ growth in PAT to INR 3.5bn, thereby, improving RoA to >2% in Q1FY24 – highest in past 15 quarters. Earnings were mainly driven by 6% QoQ growth in NII and credit cost moderating to 40bps (annualised). Top-line growth was supported by 4% QoQ AUM growth and 12bps QoQ NIM expansion. Asset quality continued to improve as reflected in GNPL and NNPL ratio moderating to 3.76% (3.83% QoQ) and 2.59% (2.76% QoQ), respectively, as on Jun’23. PCR improved to 31% from 28% QoQ.

Valuation and view

Considering the sharp improvement in stressed asset pool with NNPL further moderating to 2.59% (2.76% QoQ), sustained momentum in retail disbursements and incremental focus on high-yield segments (prime, affordable housing), management sounded confident of maintaining RoA of ~2% in the near term with RoE at 10-12%. We maintain ADD rating on the stock with a revised target price of INR 740 (earlier: INR 530), as we now value it at 1.3x (earlier: 1x) Sep’24E BVPS.

Key risks: Faster than expected AUM growth and delay in the execution of stated strategy.

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