PNB Housing Finance: Successful fundraise key to sentiment revival

Asset quality issues and pale growth justify the weak valuation

Several stocks in the housing finance space haven’t had it easy in recent years, whether with respect to managing liquidity or growing their balance sheet, or handling asset quality pangs. PNB Housing Finance is one such example and its 53 per cent stock price fall in the past two years amply reflects these concerns. There are also questions around who will pump in money as the lender prepares for Rs 1,000 crore equity raising plan, an exercise that has been in the works for over a year.

Recent news reports suggest that its promoter, Punjab National Bank (holding 32.65 per cent stake), is unlikely to support the fundraise as the banking regulator has not given its go-ahead to participate in the exercise. Whether private equity major Carlyle, a co-promoter, holding a 33 per cent stake in the firm, will remain committed to its investment needs to be seen. For now, its capital adequacy at 20 per cent is reasonably comfortable, though for a meaningful balancing act between cleaning up its books and growing its loan base, more capital is required.

Once favoured for its 20-plus per cent growth and ability to maintain gross non-performing assets (NPA) at less than 1 per cent, PNB Housing was jostled with gross NPA at 2.6 per cent in the December quarter (Q3), up from 1.8 per cent a year ago. Without considering the apex court’s stay on asset classification, the number at 4.47 per cent is the worst-ever in five years.

The provision coverage ratio (PCR) at 46.6 per cent in Q3 (up from 17.1 per cent a year ago) is still below industry standards of over 65 per cent, once again highlighting the constraints in taking the asset quality pain head on. Loan book remained on a downward slope (down 6.6 per cent year-on-year in Q3) as the lender continued to witness shrinking corporate book growth. That said, 9.8 per cent retail loan growth isn’t very uninspiring either, considering the bounce back in housing demand. Disbursements in Q3 remained flat.

While efforts are on to improve the share of retail loans, given PNB Housing’s multiple limitations, analysts at JM Financial expect just 4 per cent compound annual growth rate during FY21-23. “Resolution of stressed assets with minimal haircut, successful capital raise, and a revival in growth are key for rerating,” they note. Therefore, while valuations have melted to 0.8x FY22 estimated book, the Street isn’t enthused with the stock.