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Retailisation of AUM continues

* PNBHF reported a PAT of INR2.4b in 1QFY22 (v/s INR2.6b YoY). The 45% beat was driven by lower-than-estimated credit costs (~0.9% annualized) and opex (47%/9% below our estimate).

* Asset quality deteriorated with Gross Stage 3 increasing by 155bp QoQ to 6%. Few corporate accounts in Stage 2 and under the SICR pool slipped into NPAs. Total restructured pool (under both OTR 1.0 and 2.0) stood at INR17.33b (~2.9% of loan assets).

* PNBHF is working on different initiatives to optimize costs, leverage digital solutions to improve processes across underwriting, collections, and originations, and reduce the proportion of corporate loans in its AUM mix.

* The fate of the announced equity raise still remains the key monitorable in the near-team since a lot of other changes at PNBHF will be contingent upon the successful completion of this proposed capital raise.

* We have largely maintained our FY22E EPS estimate, wherein lower NII has been mitigated by a minor cut in credit costs. We maintain our Neutral rating with a TP of INR760/share (1.2x FY23E BVPS).

AUM fell 11% YoY; Incremental CoF below 6%

* Disbursements fell ~57% QoQ to INR17.6b, impacted by COVID-related lockdowns. AUM declined by 14% YoY/4% QoQ to INR718b. The AUM decline was partially mitigated by a lower run-off of ~24% (annualized) in the loan book (against the trend rate of 33-38% in recent quarters).

* Due to no direct assignments, no upfront assignment income was booked in 1QFY22.

* Calculated spreads declined by ~7bp QoQ to 3.05%. PNBHF is originating Home Loans at ~8.4% interest rate incrementally. Incremental CoF declined to 5.74% (down 52bp QoQ and driven by NHB and capital market borrowings).

Asset quality showed signs of COVID-19 stress; restructuring less than 3%

* Gross Stage 3/Retail GNPA deteriorated 155bp/~125bp QoQ to 6%/3.8%. Corporate GNPA rose 330bp QoQ to 15.9%.

* Deterioration in the Corporate book was largely due to slippages from Stage 2 and other SICR corporate accounts, which the company had highlighted earlier. Arena Superstructure, with an exposure of INR1.9b, was flagged off as a new NPA and is undergoing NCLT proceedings. There were no new resolutions on Corporate NPAs, and Ornate exposure of INR1.8b has now moved into the final stages of resolution.

* Total provision cover (ECL/EAD) stood at 4.5% (up ~40bp QoQ), with PCR on Stage 3 assets declining to 39.8% (down 5.5% sequentially).

* Total restructured pool (under both OTR 1.0 and 2.0) stood at INR17.33b (~2.9% of loan assets). Until 1QFY22, PNBHF has cumulatively disbursed INR3.15b under ECLGS.

Highlights from the management commentary

* Deterioration in Retail GNPA was primarily emanating from the self-employed moratorium book.

* Three Corporate NPAs (Supertech, Radius, and Arena Superstructure) have a PCR of 70%. PNBHF targets to reduce the proportion of the Corporate book to single digits (from 15% in 1QFY22).

* It expects 40-50% growth in disbursements in FY22 over FY21.

* Digital sourcing increased to ~46% in 1QFY22 from ~31% in 4QFY21.

* It already has a co-lending arrangement with Yes Bank and is in discussions with other Banks. Fee income and cross-sell income will improve, along with an expanding customer base. The co-lending arrangements will help in onboarding prime customers and retaining them.

Valuation and view

Over the past year, PNBHF has changed its business model (targeting the ‘affordable’ Unnati segment) in favor of Retail. It has focused on running down its Corporate loan book (through pre-payments or down selling) to address the issue of higher leverage/gearing. Average gearing levels have fallen to 6.4x (from 8.2x in 1QFY21), and its capital position is comfortable with a CRAR of 21.4% (Tier I: 18.4%).

While FY20-22E will always be looked upon as years of consolidation for PNBHF, we expect the company to start growing its loan book by 5-10% YoY from FY23E onwards. While it could claim to have front-loaded most of the provisions due to any contingencies that could arise from COVID-19, we expect that its credit cost will continue to remain elevated at ~1.5% in FY22E as well. We have not factored in an equity capital raise in our estimates as yet and would do so once there is more clarity on the issue post the SAT judgment. In the near-term, we expect PNBHF to deliver 10-12% RoE in FY22E/FY23E. However, asset quality risks from any newer COVID-19 waves persist. We maintain our Neutral rating, with a TP of INR760/share (1.2x FY23E BVPS).

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