Higher costs and weak asset quality pose challenges for PNB Housing

Having corrected 27 per cent year-to-date, the question is how much downside is ahead for the PNB Housing stock, which fell 3 per cent on Thursday.

Unlike peers such as Indiabulls Housing and Dewan Housing, the financier has been steadier in terms of asset quality and raising capital. With gross non-performing asset (NPA) ratio at less than 1 per cent even in the June quarter (Q1), when its peers saw the number rising above 1.5 per cent, PNB Housing’s show is noteworthy. Likewise, cost of capital contained at 8.4 per cent is also positive, as peers operated over 9 per cent.

Yet, PNB Housing’s stock isn’t reflecting these positives as repairs are underway with respect to its loan book. In Q1, the company deliberately decided to hold back on corporate loans; disbursements of which fell 81 per cent year-on-year and pulled down total disbursement by 22 per cent (see table). On the other hand, growth was better in the retail loans portfolio, with disbursement up 7 per cent YoY. The good part is that the salaried class, perceived to be less risky, accounted for 44 per cent of retail loan assets.

But in the process of realigning its book, PNB Housing has identified a watchlist of five corporate accounts or loans with potential to turn bad, of which Rs 150 crore turned bad in Q1. The top 20 accounts account for 60 per cent of corporate loans, thus indicating that asset quality could weaken further if the corporate book sees more pressure. While PNB Housing fares better than peers in terms of asset quality, gross NPA have doubled from 0.45 per cent over a year. Analysts at JM Financial Services expect the housing financier’s gross NPA to touch 1.6 per cent in FY20 in anticipation of further weakness.

It needs to be seen if there could be further increase in credit costs, which has already risen 30 basis points sequentially to 8.4 per cent in Q1. While an increase in cost of funds hasn’t hurt PNB Housing’s net interest margin at 2.2 per cent much, whether the trend continues needs to be seen.


But how well PNB Housing juggles between growth, profitability and asset quality is something that investors will watch out for in the coming quarters. This is why even if the stock is trading at attractive 1.3x FY20 book, analysts advise investors to remain on the sidelines.

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