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Strategic shift in product mix; tracking well on execution

Mix improvement to aid NIM expansion; recoveries to keep credit costs benign

* PNBHF is pivoting its product mix toward the emerging and affordable housing segments, with both these relatively higher-yielding segments now contributing ~23% to the loan mix (compared to ~18% as of Mar’23). This pivot will gradually help the company secure a structural improvement in its blended yields and eventually deliver an expansion in its NIM profile.

* The company is undergoing a transformation to morph into a franchise that will be stronger, more resilient, and one with high predictability in its earnings trajectory. Over the last two years, it has also: a) strengthened its collections function and b) nuanced its product offerings across prime, emerging, and affordable segments, each of which is managed by a strong senior management team. With a credit rating upgrade (to AA+), which has helped it moderate its CoB and made it more competitive, the company is now well-positioned to deliver ~18% loan CAGR over FY24- 27E.

* The company’s corporate loan book accounted for just ~2% of its total loan book as of Sep’24. While it is looking to restart Project Finance, PNBHF targets to keep the corporate book in the loan mix below 10% at all times. This will provide an added lever for improvement in blended yields.

* PNBHF has implemented decentralized underwriting, which has also led to an improvement in its Sanction TAT. In addition, the company has a central team that vets all the loan applications to rule out any possibility of collusion. Asset quality continues to improve for PNBHF and as of Sep‘24, the corporate GNPA was NIL (PY: 25%), while retail GNPA declined to ~1.4% (PY: 2.5%).

* We expect PNBHF to deliver a PAT CAGR of ~23% over FY24-27 and an RoA/RoE of 2.6%/14% in FY27E. The stock currently trades at 1.2x FY26E and we reiterate BUY with a TP of INR1,160 (based on 1.5x Sep’26 P/BV).

Gradual improvement in the mix, with a pivot toward emerging and affordable segments

* PNBHF will leverage the Credit Linked Subsidy Scheme (CLSS) scheme under the Pradhan Mantri Awas Yojana (PMAY) to drive stronger growth in its affordable segments across ~300 branches.

* The emerging segment (typically beyond metros) provides ~50-75bp better yields compared to the prime segment and for only a slightly riskier customer profile. Likewise, in the affordable segment, the yields are ~300bp higher than the prime segment but the ticket sizes are smaller and would require the company to handle higher volumes.

* Emerging and affordable segments contributed ~18% and ~4% to the loan mix, as of Sep’24. While the affordable (on a much smaller base) segment grew 4x to ~INR30b over the past year, the emerging segment grew ~22% YoY. We expect the growth momentum to sustain in both segments even as the company aspires to scale up the share of the emerging segment to ~20-25% and the affordable segment to ~14-16% of the loan mix by FY27.

Asset quality continues to improve; GS3/NS3 at lowest levels in five years

* PNBHF’s asset quality has significantly improved since its COVID peak. GS3/NS3 has declined from its peak level of ~8.2%/5.6% as of Dec’21 to ~1.25%/0.9% as of Sep’24.

* An improvement in the asset quality was driven by a combination of: a) resolutions of stressed wholesale exposures and b) improvement in retail asset quality through a combination of organic collections and technical write-offs. The total written-off pool stood at ~INR12.5b in the corporate segment and ~INR5b in the retail segment. Recoveries from the written-off pool have resulted in provision write-backs in P&L over the last two quarters and we expect this to continue for another two to three quarters.

* PNBHF has adopted a decentralized underwriting for better business control. It has also built strong collection capabilities and can now effectively leverage legal toolkits to resolve delinquencies. It has regularly been hosting mega auction fairs and has been able to achieve greater success in property auctions. We expect improvements in GS3 to sustain, with model credit costs of -20bp in FY25E and 25bp/27bp in FY26E/FY27E.

NIM expansion from improvements in the product mix

* With repo rate cuts expected in 1HCY25, there could be a transitory compression in NIM for PNBHF since its assets (because of competitive pressure from banks) will get repriced faster than its liabilities. However, beyond that, we expect PNBHF’s NIM to expand as the product mix evolves favorably toward emerging and affordable segments.

* Yields are higher by ~250-300bp and ~50-75bp in the affordable and emerging segments, respectively. We expect the proportion of emerging and affordable segments to improve to ~35-37% by FY27, compared to ~22% as of Sep’24. We model NIM of 4.2%/4.3% in FY26E/FY27E (compared to ~3.8% in FY25E).

Opex to remain largely range-bound despite pivoting toward emerging and affordable segments

* PNBHF operates in 20 states/UTs with ~303 branches as of Sep’24, including ~160 branches in the affordable segment and ~50 branches in the emerging segment. The company plans to open around 15 additional branches in the affordable housing segment during FY25, with a focus on expanding in the southern, western, and northern regions. Further, it targets to add ~50 new branches every year from FY26 onwards.

* Unlike other mainstream affordable HFCs, the opex for PNBHF will continue to remain between 1.0 and 1.1% (as % of avg. assets) due to shared resources across its prime, emerging, and affordable segments. We expect the cost-toincome ratio to decline to ~22% by FY27 (FY24: ~24%). Likewise, despite moving toward higher-yielding and riskier segments such as self-employed and informal segment customers, the company remains confident about delivering credit costs of ~30bp (excluding any recoveries from the written-off pool)

Valuation and view

* PNBHF is a strengthening franchise where the risk-reward profile is favorable for a long-term investor to witness this transformation over the next three years. It is well-equipped to successfully navigate the near-term headwinds in its NIM profile, and further offset them with the product mix improvement.

* We expect PNBHF to deliver a healthy ~18% CAGR in the loan book and ~23% CAGR in PAT over FY24-27, with an RoA/RoE of 2.6%/14% by FY27. The company trades at 1.2x FY26E P/BV and the risk-reward is favorable for a further re-rating in the valuation multiple as investors gain more confidence in its sustained execution in retail (both emerging and affordable segments). On the technical front, we expect the supply overhang from private equity investors to be fully resolved within the next three months, which could lead to another leg of rerating in valuation multiples. Reiterate BUY with a TP of INR1,160 (based on 1.5x Sep’26 P/BV).

* Key risks: a) a slowdown in the economy leading to lower demand for housing and moderation in loan growth and b) subsequent seasoning in the affordable loan book leading to asset quality deterioration.

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