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Subdued operating performance as margins remained suppressed 

In 1QFY23, PNB Housing Finance’s (PNBHF) reported PAT of INR 2.4bn (-3% QoQ/ +39% YoY), supported by reduction in credit cost (annualized as % of loans: 34bps vs. 102bps QoQ/ 104bps YoY). The operating metrics were muted as PPOP stood at INR 3.6bn (-3% QoQ/ -24% YoY). Other key highlights are: (i) in 1QFY23, disbursement fell 7% QoQ to INR 34.5bn due to decline in Unnati segment (affordable housing) which is getting revamped, (ii) AUM stood at INR 649bn (-2% QoQ/ -10% YoY), as construction finance continued to shrunk (-15% QoQ/ -38% YoY), (iii) cost of funds marginally inched-up (+11bps QoQ) and so as yields (+10bps QoQ), hence NIM was flattish QoQ at 2.4% (-83bps YoY), (iv) asset quality materially improved QoQ with GS3 (on loans) ratio at 6.4% (-177bps QoQ) on the back of reduction in corporate GS3; however GS2 (on loans) ratio climbed 24bps QoQ to 3.7% - GS2 +GS3 reduced to 10% (-153bps QoQ) in 1QFY23; provision coverage on GS3 was at 33% (- 477bps QoQ), (v) restructuring book shrunk 20bps QoQ to 4.1% of loan book, (vi) CRAR stood at 23.9% with Tier-1 of 21.4% and leverage at 5.1x (vs. 5.4x, as of FY22); details on capital raise are still awaited (in Mar’22, the Board decided to raise up to INR 25bn via. right issue). We forecast AUM CAGR of 4% over FY22-24E, led by retail segment. We expect PNBHF to deliver PAT CAGR of 20% over FY22-24E, with RoA/ RoE of 1.7%/ 9% by FY24E. We believe capital infusion remains a key monitorable for PNBHF. We value the HFC at 0.9x FY24E BV to arrive our TP of INR 550. Maintain BUY.

* AUM shrunk due to reducing corporate book and revamping of affordable housing segment: In 1QFY23, disbursement was INR 34.5bn, down 7% QoQ, due to decline in Unnati segment (affordable housing) which is getting revamped. Disbursement in Unnati was INR 1.4bn as the company is revamping product policy e.g. till now ATS was INR 3.5mn which will be brought down in the range INR 0.8-1.5mn – inline with market for affordable housing. BT (balance transfer) out reduced in 1Q to 9% (vs. peak of 18%), however, BT out in Unnati sharply jumped to 25% (vs. 16%, normally), as few banks became very active in affordable housing to overcome shortfall in PSL. Corporate book continued to witness prepayment and sell-down. Consequently, AUM declined 2% QoQ/ 10% YoY and stood at INR 648.5bn, where Retail housing (2% QoQ/ -4% YoY) formed 60% and corporate constituted 9% of the mix. Unnati AUM: 30.5bn (4.7% of total AUM). Salaried share of AUM was at 51% (+200bps QoQ and +600 YoY). The proportion of off-balance sheet is at c.13% of AUM (-60bps QoQ/ -270bps YoY). The HFC has started co-lending arrangement with 1 PSB (INR 0.8bn) & 1 pvt. bank and discussion are ongoing with other banks but yet to gain traction as banks need to fully integrate APIs. Mgmt. is confident Unnati segment will start gaining traction from dec onwards and will also consider corporate lending selectively. We forecast AUM CAGR of 4% over FY22- 24E, led by retail segment, with tightened underwriting standards.

* Soft operating performance: In 1QFY23, operating metrics were muted as PPOP stood at INR 3.6bn (-3% QoQ/ -24% YoY) with subdued NII at INR 3.7bn (flat QoQ/ -27% YoY). Cost of funds marginally inched-up (+11bps QoQ) and so as yields (+10bps QoQ), hence NIM was flattish QoQ at 2.4% (-83bps YoY). We forecast 8% NII CAGR over FY22-24E

* Asset quality improved sequentially: In 1QFY23, asset quality materially improved QoQ with GS3 (on loans) ratio at 6.4% (-177bps QoQ) and NS3 at 4.3% (-80bps QoQ) on the back of reduction corporate GS3 owing to upgradation, write-off, assets sold to ARC. However, GS2 (on loans) ratio climbed 24bps QoQ to 3.7%. GS2+GS3 to 10% (-153bps QoQ) in 1QFY23. Provision coverage on GS3 was at 33% (-477bps QoQ). Restructuring book shrunk 20bps QoQ to 4.1% of loan book, where c.75% of the accounts started repayments and INR 3bn slipped into GS3.

* We expect RoA/ RoE to be at 1.7%/ 9% levels by FY24E: In light of repositioning of balance sheet and revamping of product portfolio, we estimate AUM CAGR of 4% over FY22-24E, led by retail segment with tightened underwriting standards and sell-down in corporate book. We forecast PNBHF to deliver PAT CAGR of 20% over FY22-24E, partially aided by soft base and generate RoA/ RoE of 1.7%/ 9%, respectively, by FY24E. We believe capital infusion remains a key monitorable for PNBHF. We value the company at 0.9x FY24E BV to arrive our TP of INR 550. Maintain BUY.

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