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Miss on PPoP but earnings beat aided by lower credit costs

* PNB Housing Finance (PNBHF) reported 48% YoY growth in 1QFY24 PAT to ~INR3.5b (7% beat). This was aided by ~55bp QoQ decline in credit costs to ~0.4%. NII surged 68% YoY to INR6.2b while PPOP rose 41% YoY to INR5.1b.

* Total GNPA/NNPA stood at ~3.8%/2.6% (as a % of Loan Assets) and improved ~10bp/15bp QoQ. Retail GNPA improved ~10bp sequentially to 2.5% while Corporate GNPA deteriorated to 25% (PQ: 22%). Sequential increase in corporate GNPA was on account of a decline in the wholesale book.

* Affordable housing segment exhibited healthy traction with disbursements surging to ~INR2.3b in 1QFY24 (PQ: ~INR1.4b).

* PNBHF has levers for NIM improvement through product diversification and potential decline in borrowing costs. Improvement in asset quality has made it eligible for NHB borrowings and a potential credit rating upgrade will provide renewed access to the primary debt markets. Better outlook on loan growth, expansion of core margins and lower credit costs have led to ~5%/ 7% increase in our FY24/FY25 EPS estimates.

* We expect PNBHF to deliver a loan book and PAT CAGR of 11% and 26% over FY23-FY25 and ~2.1%/11% RoA/RoE in FY25, respectively. We would closely monitor the execution on loan growth, sustenance of NIM and asset quality before turning constructive on the stock. Reiterate Neutral with a TP of INR755 (premised on 1.2x FY25E BVPS).

Disbursements hit by seasonality; NIMs expand sequentially

* PNBHF’s 1QYF24 disbursements rose 7% YoY to ~INR37b. Retail disbursement grew 8% YoY to INR36.7b. AUM growth was muted at 4% YoY to INR673.4b.

* Reported NIM expanded ~10bp QoQ to ~3.9%. Management guided for long-term steady-state spreads and margin of 2.5% and 3.5%, respectively.

Credit costs moderate driven by asset quality improvement

* PNBHF’s total GS3 improved ~10bp QoQ driven by a decline in retail GS3. In 1QFY24, PNBHF delivered 10% QoQ reduction in the Corporate loan book through a combination of sell-downs, ARC sales, write-offs and resolutions. The company is actively engaged on wholesale book resolutions and guided for write-backs within the next few quarters.

* Corporate GNPA increased to 25% (PQ: 22%). One exposure accounted for ~93% of the Corporate GNPA and was backed by a large real estate developer. The company expects the same to be resolved within the next two quarters. PNBHF also guided for select recoveries even from the written-off pool of Corporate NPAs.

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