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PNB Housing Finance reported 2QFY24 PAT at INR 3.8bn, ahead of our estimates of INR3.5bn (+10% JMFe) led by stronger than expected NII of INR 6.5bn (+6.6% QoQ; +5% JMFe) which aided NIMs to inch-up +9bps QoQ at 3.95%. Steady PPoP (INR 5.5bn, +9% QoQ) and lower than estimated provisions (credit costs at 26bps vs 36bps QoQ) elevated the PAT to INR 3.8bn (+46% YoY, +10% QoQ, +10% JMFe). Almost entire disbursements in 2QFY24 came from the retail segment which grew +18% YoY to INR 41.7bn leading to retail loan growth of (+12% YoY, +2.6% QoQ). Corporate book rundown continued with -30% QoQ de-growth at INR 23.8bn (now only contributes ~4% of total loan assets). Management remains confident on delivering a 22-23% growth in retail disbursements and expect 17- 18% AUM growth in the retail business with affordable housing loans forming more 10% of overall disbursements mix. Asset quality in retail segment improved significantly (-75bps QoQ) at 1.74% GNPA. PNBHF has delivered ROAs north of 2% over the last couple of quarters. RoE uptick will follow up as it raises leverage from current levels. We like PNBHF’s reinvigorated strategy of focusing on prime+affordable segments and expect the stock to rerate driven by i) Healthy AUM growth led by retail book ii) Increasing proportion affordable housing offering higher yields and iii) Meaningfully lower credit cost compared to past cycle trends. We value the lender at 1.3x FY25E BV to arrive our TP of INR 825. Maintain BUY.

* Retail disbursement momentum continues; Scaling up affordable housing: In 2QFY24, retail disbursements were at INR 41.7bn (+18% YoY, +14% QoQ) which formed almost entire disbursements (99.6%). The disbursements in affordable housing segment saw strong momentum (though on a lower base) and stood at INR 3.7bn (+64% QoQ). Overall loan assets grew +5.2% YoY, +0.8% QoQ aided by healthy growth in retail loans at INR 585bn (+12% YoY, +2.6% QoQ) while corporate book rundown continued with - 30% QoQ de-growth at INR 23.8bn (now only contributes ~4% of total loan assets). Mgmt remains confident of increasing the proportion of affordable housing in the disbursement mix to more than 10% (from c.9% currently) by FY24. As retail disbursements scale up, we expect PNBHF to clock loan growth of 17% CAGR over FY23- 25E

* Strong operating performance: NII improved to INR6.5bn (+1% YoY, +4.2% QoQ) which aided NIMs to inch-up +9bps QoQ at 3.95%. Steady PPoP (INR 5.5bn, 9% QoQ) and lower than estimated provisions (credit costs at 26bps vs 36bps QoQ) elevated the PAT to INR 3.8bn (+46% YoY, +10% QoQ, +10% JMFe). As PNBHF expands affordable housing (higher incremental yields) in the overall mix and focuses on retail granular book we expect the NIMs to hold-up at current levels. We expect PNBHF to deliver ROA>2% for FY24-25E.

* Asset quality improves on recovery of corporate account: In 2QFY24, PNBHF through resolution recovered a large corporate account, proceeds of which were used for a) strengthening ECL provisioning of retail and corporate book b) to write off a portion of retail NPA book. This has significantly improved the overall GNPA/NNPA which stands at

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