India Ratings and Research (Ind-Ra) has downgraded PNB Housing Finance Ltd's (PNBHF) non-convertible debentures (NCDs) rating to AA from AA-plus with a stable outlook.
"The downgrade reflects challenging operating environment for majority of non-banks in the mid-to-higher ticket size housing loan segment, increasing pressure on asset quality and higher leverage in view of the portfolio composition," said Ind-Ra.
However, the rating takes into account the sizeable pan-India franchise of PNBHF, its fairly diversified funding sources and sufficient access to funding supported by the PNB brand, adequate liquidity factoring in the asset profile and experienced management.
Most housing finance companies operating in the mid-to-higher ticket housing segment have been facing an increase in funding costs as well as intensifying competition from banks.
The funding cost has increased on account of higher spreads demanded by capital market lenders as well as reshuffling of liability mix with a reduction in the proportion of short-term borrowings.
Furthermore, said Ind-Ra, yield-accretive wholesale segment and loan against property can remain under pressure. In this environment, the risk-adjusted returns are likely to be limited for PNBHF.
The ongoing challenges in the real estate sector and the wider economic slowdown have started impacting PNBHF's loan book.
This can get amplified with the seasoning of the portfolio. PNBHF's assets under management expanded at a compound annual growth rate of 44 per cent to Rs 86,300 crore in December 2019 from Rs 10,600 crore in FY14.
But the gross non-performing assets for PNBHF increased to 1.75 per cent in Q3 FY20 from 0.33 per cent in FY18.
Given the operating environment, Ind-Ra expects the delinquency in the wholesale segment to remain under pressure. The resultant credit costs can further constrain the operating metrics.
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