Multiple negatives derail stock price of PNB Housing; more downsides ahead

Higher funding costs, uncertainty around stake sale has Street worried

The PNB Housing stock slid 5 per cent on Wednesday to Rs 1,006 apiece. Including the last week, the fall has been a sharp 24 per cent. 

Despite the correction, experts believe there could be more downsides, citing three factors. They are the potential increase in cost of funds after the IL&FS turmoil, potential asset-liability mismatch (ALM), and the proposed stake sale by PNB Housing’s promoters — Punjab National Bank and Carlyle group. 

PNB Housing meets 35 per cent of its funding needs through non-convertible debentures — mostly short-term instruments. Based on June 2018 (Q1) numbers, its cost of funds stood at 7.73 per cent and net interest margin (NIM) at 3.21 per cent. 

In comparison, the cost of funds stood at 7.71 per cent and NIMs were at 3.45 per cent, showing how rising interest rates are slowly pinching the company. 

The lender’s Q1 investor presentation indicates a gap of Rs 51 billion of liabilities over assets in the next 12 months, and a negative ALM of Rs 51 billion for liabilities maturing in the next one to three years. 

In a favourable interest rate scenario, rolling over liabilities will not be an expensive proposition. But in a liquidity-crunch situation, coupled with increasing interest rates, that is not the case. Analysts at Credit Suisse estimate that a 100 basis point (bp) increase in bond yield and 50 bp increase in bank rates could lead to a 49 bp increase in PNB Housing’s blended cost of funds. This could hurt net interest margin by 50 bps. 

Further, unlike some other NBFCs that are able to pass on the higher interest cost, pricing power of housing finance firms is constrained given competitive pressures from banks. 

Irrespective of these developments, the proposed stake sale was already an overhang on the PNB Housing. 

JP Morgan, with an ‘underweight’ rating on the stock has highlighted that pricing at which the transaction eventually closes will be key. “We expect stock volatility to be high as news around this develops,” it mentioned in a note.

To sum up, the September quarter (Q2) results will be a key monitorable. “Investors would want to be reassured about the ALM issue which has now become a worry in the context of liquidity crunch,” says an analyst reviewing his ‘buy’ rating on the stock. Till then, the Street expects the stock to remain under stress.