PNB Housing Finance is transitioning to offer a wider range of mortgage solutions, focusing on affordable home loans and emerging markets. With a strategic shift towards retail lending, the company has improved its credit ratings and aims to reduce corporate loans. Despite potential short-term challenges in net interest margins, the company's focus on affordable housing and digital enhancements is expected to drive growth. Projections indicate strong growth in assets under management and profits, positioning the company for positive performance and potential re-rating in valuation.
PNB Housing Finance (PNBHF) intends to change from being a lender that specialises in luxury homes to one that provides a broad range of mortgage solutions for different product groups and clientele. It will launch its affordable home loans (Roshni) vertical in FY25 and expand into the emerging market vertical as well. By reducing the percentage of corporate loans in the total loan mix to 4% in December 23 from 21% in March 20, the company has reorganised its business strategy and given the retail segment priority. This was accomplished through down-selling, recoveries, and ARC sales.
PNB Housing has been upgraded to AA+ by all three Credit Rating Agencies (CRAs) in the last three months: India Ratings, ICRA, and CARE. The credit rating upgrading has the potential to lower PNB Housing's borrowing costs by 20-25 basis points. However, given the heightened level of competition and the significantly smaller income contribution from the corporate loan books, there may be short-term pressure on its net interest margin (NIM). However, the company's move in strategy towards more affordable homes and developing verticals could improve its product mix and limit the negative effects on its NIM.
PNB Housing has introduced digital channels to speed up the collection procedure, among other noteworthy improvements to its collection architecture. We project that GS3 improvements will continue, and for FY25E and FY26E, credit costs will be 30bps apiece. Its corporate and retail write-off pools total USD 1,700 crore and EUR 500 crore, respectively. Profitability might increase and credit costs could be further reduced as a result of recoveries from this pool.
PNB Housing has the necessary tools to effectively manage the short-term challenges in its NIM profile and even mitigate them through better product mix. Over FY 24-26, we anticipate the company to generate an impressive 18% CAGR in AUM and 26% CAGR in PAT, with an expected RoA/RoE of 2.4%/13.0% by FY26.
The company is currently trading at 1.1x PY26E P/BV, and as investors grow more confident in its continued retail execution, the risk-reward is suitable for a further re-rating in the valuation multiple.
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