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Tide has turned, smooth ride ahead

Set to deliver PAT CAGR of 25% over FY24E-FY26E and RoA/RoE of 2.5%/~14% in FY26

* Over the past two years, PNBHF has successfully transformed its business model into retail (both prime and affordable verticals) and has reduced its corporate loan book to ~4% of the AUM mix. In Apr’23, PNBHF completed its rights issue of ~INR25b, which has brought in confidence capital and has strengthened its case for a credit rating upgrade from credit rating agencies (CRAs). India Ratings recently upgraded PNBHF to AA+.

* PNBHF has set up an affordable housing (AH) vertical with exclusive sales, underwriting and collections. It has already crossed 100 AH branches in Nov’23 and plans to scale up to ~160 AH branches by Mar’24. In Dec’23, the AH vertical’s loan book surpassed ~INR10b, and we expect it to rise to ~INR70b and form ~8% of retail loans by Mar’26.

* With prime, affordable housing and the corporate segment resuming their growth trajectories, we estimate PNBHF to deliver a CAGR of ~18% in loans over FY24-FY26.

* The NIM expansion is expected to be driven by improvements in yields (through better product mix) and a potential decline in borrowing costs. In FY24, it has received a sanction from the NHB, which lends to HFCs at a rate that is at least 200-220bp lower than that of other borrowing instruments.

* As of Sep’23, retail/corporate GNPA fell to 1.7%/2.9% (vs. 3.4%/30% last year), with total GS3 at 1.8%. With asset quality stress in retail (due to Covid) and corporate (post the IL&FS default) now behind, we expect asset quality to continue to improve and credit costs to remain benign at ~40bp in FY25- FY26.

* PNBHF is our top pick, considering a) visibility of an ~18% CAGR in loans from FY25 onward, b) potential NIM expansion, c) expansion in RoA aided by moderation in credit costs, and d) improvement in RoE as the leverage improves on the balance sheet. We expect PNBHF to deliver a PAT CAGR of ~25% over FY24-26 and RoA/RoE of 2.5%/14% in FY26. We have a BUY rating and a TP of INR1,025 (based on 1.4x FY26E P/BV).

Healthy loan growth to return in Retail while Corporate will be an enabler

* The company has now turned over a new leaf under the leadership of Mr. Girish Kousgi who joined PNBHF in Oct’22. The senior/middle leadership has been also strengthened over the last one year under the new leadership.

* PNBHF was in consolidation mode over FY20-FY23, with its AUM declining or remaining flat every successive year. The retail segment also declined because of the company’s inability to compete with peers.

* The retail vertical has been strengthened now with the launch of affordable housing and the expected resumption of loan growth in the corporate segment from FY25. We expect PNBHF to report an AUM CAGR of ~18% over FY24-26

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