PNB Housing: Margins will continue to be under pressure even in medium term

The stock of PNB Housing Finance (PNB Housing) has declined by over three per cent after the company announced its June quarter results last week. Given the Street’s concerns on profit margins, the stock is likely to remain under pressure. 

While the company clocked strong growth in loan book (47 per cent year-on-year) and asset quality was also satisfactory (gross bad loans flat at the year-ago level of 0.43 per cent), a net interest margin (NIM) compression, amid lower spread, disappointed investors. 

A 38 basis point dip in average yields led to a 36 basis point year-on-year contraction in reported NIM to 2.74 per cent. 

Margins will continue to be under pressure even in the medium term, with a likely lower spread, despite rate hikes of 25 basis points and 15 basis points in April and July, respectively. 

“Spreads are likely to remain under pressure, as the increase in home loan rates may not be able to match the rise in cost of funds, in our view,” said Shubhranshu Mishra of Motilal Oswal Securities.

However, the management believes that rate hikes take time (around 105 days) to get reflected in terms of yield on advances, leading to nominal spread compression. 

PNB Housing’s managing director Sanjaya Gupta believes that new business will give it better yields and limit the pressure on spreads, with margin recovery playing out in a quarter to two.

Moreover, competitive intensity is another hurdle that needs to be taken into account while tackling high cost burden due to rise in policy rates and bond market pressure (over 51 per cent of borrowings were through terms loans and debentures as of June). Many public sector banks and private lenders are stepping up focus on retail space including housing, and have cheaper rates.

“It is easier to pass on the incremental cost of borrowing through shorter-tenure products, such as loan against property, than consumer-centric home loans. This will help maintain blended yields,” says Mishra. 

Thus, how the company actually manages its profitability in the coming quarters will be a key monitorable. One source could be access to public deposit (18 per cent of borrowing mix as of June).

Meanwhile, Gupta does not see any negative impact of PNB Housing’s stake sale by its parent. In fact, if any deal goes through, it should ease the overhang and a new owner should likely improve the focus on business.