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3QFY24 - Soft quarter

In 3QFY24, PNB Housing Finance (PNBHF) missed our expectations as lower than expected NII (INR 5.9bn, -17% YoY, -8% QoQ, -10% JMFe) and elevated opex (INR 1.7bn, flat QoQ) resulted in less than anticipated PPOP (-20% YoY, -2% QoQ, -10% JMFe) and PAT (INR 3.4bn, +26% YoY, -12%QoQ, -11% JMFe). Lower adj. yields (-19bps QoQ) and stagnant adj. cost of borrowings (-1bp QoQ) resulted in sequential NIM contraction (3.65%, -19 bps QoQ). Elevated competition and recent RBI circular potentially mandating HFCs to keep higher liquidity buffer on deposits might result in continued pressure on margin in the near term. However, expansion of product suite in higher yielding affordable segment and incremental growth in emerging geographies (beyond prime) will provide levers to manage NIM aided by latest rating upgrade. Moderate growth in overall loan assets (INR 623bn, +7.4% YoY, +2.4% QoQ) was led by retail loans (INR 601bn, +13.2% YoY, +2.8% QoQ) while corporate book (INR 22.1bn, -7.3% QoQ) rundown continued, which now contributed only 3.5% of total loan assets. Asset quality remained stable for the quarter with GNPA/NNPA at 1.73%/1.14% (-5bps/-5bps QoQ) and mgmt. expects recoveries of up to INR 22bn (INR 17bn from corporates and INR 5bn from retail) starting 4Q24. The stock has outperformed NIFTY 50 over 3m/6m/12m by 6.4%/ 22.4%/72% as it clocked ROAs of around 2% over the last three quarters. We believe further upside will be contingent to i) strong loan asset growth led by retail book ii) continued expansion of the higher yielding affordable segment and iii) meaningfully lower credit cost compared to past cycle trends. We value PNBHF at 1.3x FY26E BV to arrive at a TP of INR 920. Maintain BUY.

Moderate loan growth was supported by retail segment; scaling up affordable housing: In 3QFY24, moderate growth in overall loan assets (INR 623bn, +7.4% YoY, +2.4% QoQ) was led by retail loans (INR 601bn, +13.2% YoY, +2.8% QoQ) while corporate book (INR 22.1bn, -7.3% QoQ) rundown continued, which now contributed only 3.5% of total loan assets. Retail disbursements were stagnant sequentially at INR 41.1bn (+22% YoY, -1.3% QoQ) while the disbursements in affordable housing segment grew to INR 4.1bn (+9% QoQ). PNBHF plans to expand its affordable housing product range, projecting a yield enhancement of around 100bps from 1QFY25 in this segment. However, mgmt. slashed its loan growth guidance from 17% to 15% for FY24, while maintaining 17% expected growth rate for FY25. We revise our avg. loan growth down to 16% over FY24E-FY26E

Lower NII leads to a less than anticipated PAT; NIM contracts: Lower than expected NII (INR 5.9bn, -17% YoY, -8% QoQ) and elevated opex (INR 1.7bn, flat QoQ) resulted in a less than anticipated PPOP (-20% YoY, -2% QoQ) and PAT (INR 3.4bn, +26% YoY, - 12%QoQ, -11% JMFe). Lower yields (due to reducing corporate mix, one time impact of mclr change on securitised book and higher competition) and stagnant cost of borrowings (adj. for one time ECB hedging cost) resulted in sequential NIM contraction (3.65%, -19 bps QoQ). Mgmt. aims to bring down CoB (owing to latest rating upgrade and NHB borrowings) and plans to introduce higher yielding “Emerging segment” in Q1FY25 (30-40 bps higher yields than prime) to combat NIM compression. Elevated competition and recent RBI circular potentially mandating HFCs to keep higher liquidity buffer on deposits might result in continued pressure on margin.

Asset quality stable; expect recoveries: Asset quality remained stable for the quarter with GNPA/NNPA at 1.73%/1.14% (-5bps/-5bps QoQ). PCR stands at 34.1% (vs 33.3% QoQ) of GS3 assets. Credit cost for 9MFY24 stood at 32bps. As the company continues to run down its corporate book and focuses on granular retail assets, mgmt. expects recoveries of up to INR 22bn (INR 17bn from corporates and INR 5bn from retail) starting 4Q24. We build in avg. credit costs of 34bps over FY24E-26E.

Valuation and view: PNBHF has outperformed NIFTY 50 over 3m/6m/12m by 6.4%/ 22.4%/72% as it clocked ROAs of around 2% over the last three quarters. RoE uptick will follow up as it raises leverage from current levels. We believe further upside will be contingent to i) Strong loan asset growth led by retail book ii) Continued expansion of the higher yielding affordable segment and iii) Meaningfully lower credit cost compared to past cycle trends. We value PNBHF at 1.3x FY26E BV to arrive at a TP of INR 920. Maintain BUY.

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