PNB Housing scores on asset quality, lags peers on profitability

Punjab National Bank’s housing finance subsidiary has started the process of getting listed through an initial public offer (IPO) of equity.

PNB Housing Finance is the country’s fifth largest in the segment by loan portfolio size. Many of its peers (of different sizes and business models) in the segment are listed but, in terms of loan portfolio, the closest are only Indiabulls Housing Finance (Indiabulls HF) and Gruh Finance (Gruh). A comparison with these reveals a mixed picture for PNB HF and throws up some interesting points.

First, strong parentage allows it to leverage the PNB brand in sourcing funds and also aids its credit rating. However, Indiabulls HF and Gruh also enjoy strong parentage, of Indiabulls and HDFC, respectively.

The concern stems from the post-IPO period, when PNB HF will cease to be a subsidiary of PNB, as well as a governmentowned entity. For, PNB's stake will fall to 35-37 per cent, from 51 per cent currently. This could affect PNB HF's ability to source funds at a cheaper rate from banks and via nonconvertible debentures.

Also, going by the company’s draft prospectus, a key risk to its operations is any decline in PNB’s stake to below 30 per cent, as well as the parent competing with it via its other subsidiaries in the lending business. Since PNB HF has not been very aggressive in its own brand building, largely piggybacking on the parent's, this could impact its business. Also, there is no clarity on usage of the brand, should PNB start competing with PNB HF.

Operationally, PNB HF has relatively high loan exposure to self-employed individuals, at about 24 per cent, a segment perceived as risker. This is 18 per cent for Gruh but lower than the 30 per cent for Indiabulls HF. Additionally, PNB HF derives about 18 per cent of its loans from the loan against property or LAP segment. While this is also perceived to be risker, higher yields and a lower loan to value ratio can provide some comfort. In recent quarters, however, yields on LAP products have been coming down for most entities, given the high competitive intensity in this segment. So, these will be areas to watch.

Another aspect to note is the cost to income ratio, a profitability indicator. At 25.69 per cent, PNB HF's is among the highest in the sector, indicating lower profitability. As it aims to expand into select regions and markets, it might remain elevated for some time, believe analysts. The benefits of a large scale will start kicking in only gradually. The higher costs have also kept its return on assets ratio low, at 1.35 per cent; it is 1.5-3.7 per cent for peers. Consequently, PNB HF's return on equity ratio, though decent, is below peers at about 17.6 per cent.

Finally, PNB HF’s capital adequacy ratio (CAR) of 12.68 per cent is also lower than Indiabulls HF’s 23 per cent and Gruh’s 17.8 per cent. However, as the entire IPO proceeds of ~2,500 crore will flow into PNB HF, this concern will be more than addressed (given its net worth of about ~2,100 crore). A questionnaire e-mailed to the PNB HF team remained unanswered till the time of filing this story.

There are positives, too. In fact, these business aspects are something many of its peers would be craving. The biggest positive is on asset quality. PNB HF's gross non-performing assets ratio is a mere 0.22 per cent, better than most peers, including Gruh's 0.32 per cent. Its asset quality is among the most comforting of factors, given the stress the banking and finance sector is going through. This is despite the exposure to risker segments like loans to self-employed individuals and LAP. The second important aspect is business growth. The company has grown its loan book at a robust compounded annual rate of 62 per cent, among the highest in the sector.

While strong loan growth and good asset quality should help PNB HF stand out, the key ahead will be the IPO valuations, plus the management's ability to catch up with peers on parameters where the company lags.