26 September 2016 Company Update | Sector: Financials PNB ... … · such as loan processing,...

26 September 2016Company Update | Sector: Financials

PNB Housing Finance BSE SENSEX S&P CNX Not Rated28,294 8,723

Financials Snapshot (INR b) Y/E Mar FY14 FY15 FY16 Loan Book (INR b) 106 168 272 Growth (%) 60 59 62 Net Worth (INR b) 9 16 21 Growth (%) 51 69 36 Net Interest Income (INR b) 2.5 4.1 6.8

Growth (%) 47 60 68 Cost-to-income ratio (%) 34.3 35.5 30.2

PAT (INR b) 1.3 1.9 3.3 Growth (%) 40 50 69 NIM (%) 2.7 2.7 2.9 RoA (%) 1.4 1.3 1.3 RoE (%) 16.7 15.4 17.6 BVPS (INR) 142 152 169 GNPA (%) 0.32 0.2 0.22 Tier I CAR (%) 9.52 9.94 9.02

Loan mix

Large franchise with strong growth momentum

We studied the Draft Red Herring Prospectus of PNB Housing Finance. Below are the key takeaways:

About the company PNB Housing Finance (PNBHF) is the fifth-largest housing finance company (HFC) in India in terms of loan book size (INR256b). It has a diverse product suite offering retail home loans, loans against property (LAP), corporate term loans, construction finance, and lease rental discounting (LRD). It conducts operations from a network of 47 branches, 16 processing units and 5,000 channel partners across North, West and South India. PNBHF was incorporated in 1988 as a subsidiary of Punjab National Bank (PNB). In 2009, PNB sold 26% stake to Destimoney Enterprises (now a Carlyle Group entity). In 2012, Destimoney Enterprises increased its stake to 49%.

Business view PNBHF started operations in 1988. In FY11, it initiated a restructuring program titled ‘Project Kshitij’. The intent was to centralize and standardize business processes, sourcing strategies and credit policies. PNBHF also made changes to the organization structure, developed a robust IT platform and introduced a fresh marketing initiative. This restructuring, which concluded in FY16, significantly improved the business and drove a robust 60%+ loan book CAGR over FY12-16. However, the cost structure still remains high as compared with peers, due to higher advertising and loan origination expenses. Cost-to-income ratio (calculated) in FY16 was 30% as compared to ~15-18% for peers. Return ratios (FY16 RoA/ RoE 1.35%/17.6%) are lower when compared to peers and also lower than the sector average RoA of 2.2% and RoE of 21.6%. Asset quality is healthy, with GNPA of 0.2% as of FY16. However, the loan portfolio is not fully seasoned to reflect true underlying asset quality.

Key Risks Key risks that the company could encounter over the medium term are a) Slowdown in real estate demand could hamper growth b) Sharp fall in property prices can lead to risk on non-housing portfolio, which is a significant proportion of overall portfolio c) Competition from banks and HFCs to put pressure on margins and profitability d) High proportion of portfolio is unseasoned, hence asset quality could surprise negatively e) In 2015, NHB conducted an inspection and identified certain deficiencies. In the event the company is not able to resolve these deficiencies, it may result in restriction of its ability to conduct business as it currently does.

Housing loans 71.5

Non housing loans 28.5

Sunesh Khanna ([email protected]); +91 22 3982 5521 Piran Engineer ([email protected]); +91 22 3980 4393 Alpesh Mehta ([email protected]); +91 22 3982 5415

Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

PNB Housing Finance

26 September 2016 2

India’s fastest-growing housing finance company PNB Housing Finance Limited (PNBHF) is the fifth-largest HFC by loan portfolio and one of the fastest-growing HFCs in India. Its loan portfolio grew at a CAGR of 61.76% (3.3x the industry growth) from INR39b in FY12 to INR271.7b in FY16. It also has the second-largest public deposit base among HFCs after HDFC. PNBHF caters to both the salaried and self-employed customer segments. It was incorporated in 1988 as PNB Housing Finance Private Limited, a wholly owned subsidiary of Punjab National Bank (PNB, one of the largest public sector banks in India). Subsequently, the company registered as an HFC with the NHB in 2001. PNB now holds 51% stake in the company, with the remaining 49% being held by Destimoney Enterprises (DEPL). DEPL is now owned by Carlyle Group’s Quality Investments Holdings. PNBHF offers retail home loans, and non-housing loans in the form of loans against property (LAP), lease rental discounting loans (LRD) and corporate term loans (CTL). It also offers construction finance loans to real estate developers for residential projects. PNBHF conducts its operations through 47 branches, 16 processing hubs, a central support office in New Delhi, and 5,000 channel partners across the northern, western and southern regions of India. As of March 31, 2016, housing loans constituted 70% of PNBHF’s total loan portfolio, with retail housing loans constituting 87% of its total housing loan portfolio. The average loan size (at origination) in the retail housing segment is INR3.2m, with a weighted average loan-to-value ratio (LTV) of 65.9%. Exhibit 1: Key milestones Year Details 1988 Incorporation of the Company 2003 Company notified under the SARFAESI Act. 2006 Crossed INR10b in loan portfolio

2009 PNB sold 26% of its stake in the total issued, subscribed and paid-up share capital of the Company to DEPL 2010 Launched the business process re-engineering project, “Kshitij”

2012 DEPL increased its shareholding to 49% in the Company, pursuant to the conversion of CCDs issued to DEPL in 2009 2013 Crossed INR10b retail deposits. 2014 Profit after tax crossed INR1b; portfolio crossed INR100b 2015 Implemented end-to-end Enterprise System Solution. 2016 Crossed INR 250b loan portfolio and INR7b deposits

Source: MOSL, Company

PNBHF is the fifth-largest HFC in India in terms of loan

book and offers a suite of products including home

loans, LAP and construction finance

Average ticket size of home loan is INR3.2m, with LTV of

66%

PNB Housing Finance

26 September 2016 3

Diverse product offering across retail and corporate

PNBHF has a diversified product suite comprising housing and non-housing loans. As of FY16, housing loans comprised ~70% of total loans, with retail home loans comprising ~87% of housing loans (60% of total loan portfolio) and construction finance comprising the rest. Within non-housing loans, LAP comprises ~60% (18% of total loan portfolio); LRD, corporate term loans comprise the rest.

PNBHF follows stringent underwriting standards, with retail housing loans originated at an LTV of 66% and retail non-housing loans (LAP) originated at an LTV of 46%.

Exhibit 2: Loan mix: Housing loans form over 70% of book


Exhibit 3: Retail home loans constitute 61% of total portfolio


The company has a network of 47 branches across the northern, western and southern regions, through which it sources loans. In addition to its in-house teams, it has a large network of agents for loan sourcing. It also has 16 processing offices and one central support office (CSO). The branches act as the primary point of sale and assist with the origination of loans, various collection processes, sourcing deposits and enhancing customer service, while the processing hubs and zonal offices provide support functions such as loan processing, credit appraisal and monitoring. The CSO supervises operations nationally.

Exhibit 4: Loan sourcing mix: 55% of sourcing in-house (%)


Exhibit 5: Loan mix by geography (%)


Housing Loans (%)

71.5

Non housing

loans (%) 28.5

Home loan, 61%

CF , 9%

Corp loans , 3%

LAP, 18%

NRP Loans , 4%

LRD , 4%

47 53 55

53 47 45

FY14 FY15 FY16

In house External

Northern region

40

Western region

30

Southern region

30

Home loans comprise 61% of total loans, while LAP constitutes 18% of total

loans

Around 55% of incremental loans are sourced in-house

PNB Housing Finance

26 September 2016 4

Within its peer group, PNBHF has a relatively low share of retail home loans (61% as of FY16). It also has a high proportion of loans to self-employed customers, similar to peers like Repco Home Finance, GRUH Finance and Can Fin Homes.

Exhibit 6: Share of retail home loans in total loan book


Exhibit 7: Share of developer loans in total loan book


Exhibit 8: Customer segment mix (%)


52 61

69 72 80 83

88 92

IHFL PNBHF HDFC DHFL REPCO Can Fin LICHF GRUH

27

22 21

12

4 3 0 0

HDFC IHFL PNBHF DHFL GRUH LICHF REPCO Can Fin

Salaried 40

Self Employed 45

Loans to corporates

15

High share of developer loans as compared to peers

The company has a high share of loans to self-

employed customers (53% of individual loans)

PNB Housing Finance

26 September 2016 5

Ticket sizes of loans from PNBHF amount to INR3.2m at an average LTV at origination of 66%. Ticket size is higher than competitors, as competitors have much deeper presence in rural geographies.

Exhibit 9: Average ticket size (INR m)


Exhibit 10: LTV at origination (%)


0.9 1.1 1.1

1.7 2.1 2.2

2.4

3.2

GRUH DHFL REPCO Can Fin LICHF HDFC IHFL PNBHF

47 53

59 65 65 66

70

LICHF DHFL GRUH HDFC REPCO PNBH IHFL

Ticket size of INR3.2m for retail home loans is higher

than competitors

PNB Housing Finance

26 September 2016 6

Business restructuring has improved performance

In FY11, PNBHF initiated a business restructuring program, which concluded in FY16. This exercise included:

Improvement, centralization and standardization of business processes,payments and credit policies; changes in origination and sourcing strategy; andchanges in product composition and target customer segments.

Changes to the organization structure, which involved significant changes incredit underwriting and monitoring functions and the hiring of in-house salesteams, fraud prevention specialists, collection experts and in-house legal,technical and property valuation experts.

Creation and implementation of a new operating model, wherein the brancheswere positioned to act as the primary points of sale and assist with theorigination of loans, various collection processes and enhancing customerservice, while the processing hubs were positioned to provide support functionssuch as loan processing, credit appraisal and monitoring.

Development of a new IT platform that improved the efficiency of operations.PNBHF also undertook a marketing program to reposition the ‘PNB Housing’brand and create a new logo and tagline.

This exercise drove 61% loan book CAGR and 43% profit CAGR over FY12-16.

Exhibit 11: 61% loan book CAGR over FY12-16


Exhibit 12: 43% PAT CAGR over FY12-16


Exhibit 13: FY12-16 loan book CAGR – best among peers


38 54 86 144 256 -

43

60 67 78

FY12 FY13 FY14 FY15 FY16

Loan book (INRb) Loan Growth (%)

774 928 1,297 1,941 3,276

20

40 50

69


Net Profit (INRm) Profit Growth (%)

16% 19% 24% 25%

29% 29%

41%

61%

HDFC LICHF IHFL DHFL GRUH REPCO Can Fin PNBHF

PNBHF undertook an exhaustive restructuring

exercise over FY11-16, resulting in significantly improved performance

FY12-16 loan book CAGR has been highest among

peers

PNB Housing Finance

26 September 2016 7

The company still has a long way to go in terms of efficiency improvement. Cost-to-income ratio (calculated) is elevated at 30%, and remains higher than most peers. Growth in operating expenses has been driven primarily by growth in ‘other opex’ as compared to growth in employee expenses. Main drivers of ‘other opex’ growth have been advertising and loan acquisition costs.

Exhibit 14: Trend in employee expenses


Exhibit 15: Trend in other operating expenses


Exhibit 16: Advertising and loan acquisition grew at 87% CAGR over FY12-16


154 254 404 671

753

65 59

66

12


Employee expenses (INR m) Growth (%)

193 377 689 1,159 1,786

96 83

68 54


Other Opex (INR m) Growth (%)

9 22 55

118

231

23 71

190

308

515


Advertising costs (INR m) Loan acquisition costs (INR m)

The company is yet to achieve further operating

efficiencies – C/I ratio remains higher than most

peers

Other opex has grown faster than growth in

employee expenses

Main drivers of ‘other opex’ growth have been

advertising and loan acquisition costs.

PNB Housing Finance

26 September 2016 8

Exhibit 17: Cost-to-income ratio (calculated) improved in FY16


Exhibit 18: Cost-to-income ratio (calculated) is elevated compared to peers


23.7 30.9 34.3 35.5 30.2

0.8

1.0 1.1

1.2

1.0


Cost to income (%) Cost to assets (%)

10

15 15 18 19 20

30 30

HDFC IHFL LICHF GRUH REPCO Can Fin DHFL PNBHF

Cost structure elevated compared to most peers

PNB Housing Finance

26 September 2016 9

Stable margins in competitive environment

Given the diversified loan portfolio with significant share of non-retail loans and self-employed customers, PNB HF has enjoyed high loan yields. While it currently earns ~10.5% yield on home loans, it earns around 100-300bp more on LAP. In addition, self-employed customers are charged 75-150bp more on housing loans due to the inherent volatility of their cash flows. At the same time, the company has worked to diversify its liability profile.

Over the past four years, the company significantly reduced share of bank borrowings from 34% in FY14 to 6% in FY16. The company is a deposit-accepting HFC, and retail deposits comprise ~30% of its total borrowings. With the reduction in share of bank borrowings and the corresponding increase in share of market borrowings, the company has managed to reduce its cost of funds significantly.

Exhibit 19: Significant reduction in share of bank borrowings

Source: Company, MOSL, Note: Others includes public deposits and ECBs

Exhibit 20: Share of bank borrowings versus peers

Source: Company, MOSL

12 13 10 11 8

34 35 33 15

6

43 35 40

30 38

0 0 0

11 21

11 17 17 33 28


NHB Banks NCD CP Others

72

53 49

38

27 18

13 6

REPCO DHFL IHFL GRUH Can Fin HDFC LICHF PNBHF

Over the past four years, the company significantly diversified its liability mix,

maintaining stable margins despite yield pressure

PNBHF has the lowest share of bank borrowings versus

peers

PNB Housing Finance

26 September 2016 10

Exhibit 21: Share of market borrowings and public deposits versus peers


Exhibit 22: Both yields and CoF trending lower; marginal expansion in spreads


Exhibit 23: Net interest margin expanded 4bp over FY14-16


PNBHF lies in the middle of the range in terms of spreads vis-à-vis competitors. However, margins are lower than peers due to a high leverage.

Exhibit 24: Spreads (FY16) compared to peers


Exhibit 25: Margins (FY16) are lower than most peers


84 83 82

51 41 36

23

6

PNBHF LICHF HDFC IHFL DHFL Can Fin GRUH REPCO

11.6 11.7 11.2

9.3 9.3 8.7

FY14 FY15 FY16

Yields (%) Cost of borrowings (%)

2.93 2.94

2.98

FY14 FY15 FY16

Net interest Margins (%)

3.55 3.44 3.00

2.51 2.49 2.29 1.86

1.52

GRUH IHFL REPCO PNBHF Can Fin HDFC DHFL LICHF

2.47 2.96 2.98

3.24 3.90

4.21 4.60

LICHF DHFL PNBHF Can Fin HDFC GRUH REPCO

High share of market borrowings (including public

deposits)

Spreads are in the middle of the range as compared with

peers. Margins, however, are lower, due to higher

leverage

PNB Housing Finance


Stable asset quality, Moderate return ratios

With the implementation of the business restructuring program, PNBHF has delivered superior loan growth as compared with peers. Yet, it has not compromised on underwriting standards. As a result, with a stable GNPA of 0.2%, its asset quality is best in class and comparable with private sector peers. However, since the portfolio has grown at a robust 60%+ CAGR over the past four years, we believe it may not be seasoned enough to reflect the true asset quality picture.

Exhibit 26: Strong asset quality


Exhibit 27: GNPA as of FY16 (%) – Best-in-class asset quality


PNBHF has generated consistent RoA/RoE of ~1.4%/17% over the past few years. RoA is understated due to high leverage, which results in lower margins. However, the company’s moderate margins and high cost structure (C/I of ~30%) continue to be a drag on profitability.

0.68

0.39

0.24 0.23

FY13 FY14 FY15 FY16

GNPA (%)

0.19 0.23 0.32

0.44

0.70 0.84

0.93

1.20

Can Fin PNBHF GRUH LICHF HDFC IHFL DHFL REPCO

With GNPA of 0.2%, asset quality is good; however,

the portfolio is not seasoned enough

PNB Housing Finance


Exhibit 28: Fee income to Total Income (FY16) – Comparison with peers


Exhibit 29: Return ratios have picked up in FY16, but still remain lower than peers


Exhibit 30: RoA (FY16, %) lower than peers


14.5

11.3 9.9 9.4 8.8 8.6

6.8

4.6

IHFL Can Fin PNBHF DHFL GRUH REPCO HDFC LICHF

18.2 16.7 15.4 17.6

1.5

1.4 1.3

1.3

FY13 FY14 FY15 FY16

RoE (%) RoA (%)

3.3

2.6 2.4 2.2

1.6 1.5 1.3 1.2

IBHF HDFC GRUH REPCO Can Fin LICHF PNBHF DHFL

PNBHF has robust fee income compared to most

peers

Return ratios are lower than peers due to higher cost

structure

PNB Housing Finance


Exhibit 31: As a result, RoE (FY16, %) lower than peers


Exhibit 32: DuPont analysis (%) FY13 FY14 FY15 FY16 Interest Income 10.50 11.00 10.93 10.45 Interest Expended 7.64 8.35 8.27 7.64 Net Interest Income 2.86 2.65 2.66 2.81 Non Interest Income 0.52 0.67 0.72 0.64 Net Income 3.38 3.32 3.37 3.45 Operating Expenses 1.04 1.14 1.20 1.04 Cost to Income Ratio 30.90 34.30 35.49 30.25 Operating Profit 2.34 2.18 2.18 2.40 Loan Loss Provisions 0.21 0.32 0.25 0.33 PBT 2.13 1.86 1.93 2.07 Tax 0.59 0.51 0.66 0.73 Tax Rate (%) 27.90 27.54 34.09 35.04 PAT 1.54 1.35 1.27 1.35 Leverage 11.88 12.37 12.17 13.08 RoE (%) 18.24 16.71 15.45 17.60


Exhibit 33: DuPont Analysis (FY16) – Lower margins and high cost structure a drag on profitability HDFC LICHF IBHF DHFL GRUH REPCO PNBHFL

Interest Income 10.34 10.90 12.45 11.60 12.28 12.31 10.45 Interest Expended 7.14 8.30 7.89 9.14 8.08 7.92 7.64 Net Interest Income 3.20 2.60 4.56 2.46 4.21 4.39 2.81 Non Interest Income 0.93 0.20 2.20 0.58 0.47 0.43 0.64 Net income 4.13 2.80 6.75 3.04 4.68 4.82 3.45 Operating Expenses 0.44 0.40 0.98 0.91 0.84 0.93 1.04 Cost to Income Ratio (%) 10.71 14.70 14.54 30.08 18.03 19.28 30.25 Operating Profit 3.69 2.40 5.77 2.13 3.84 3.89 2.40 Provisions/write offs 0.10 0.10 0.80 0.29 0.22 0.57 0.33 PBT 3.59 2.30 4.97 1.83 3.62 3.33 2.07 Tax 1.11 0.80 1.23 0.62 1.18 1.16 0.73 Tax Rate (%) 30.93 35.20 24.80 33.84 32.60 34.77 35.04 PAT 2.48 1.50 3.74 1.21 2.43 2.17 1.35 Leverage (x) 8.20 13.20 7.27 12.45 12.93 7.83 13.08 RoE 21.43 19.30 27.16 15.11 31.47 16.99 17.60


Asset-Liability Management PNBHF has a short-term mismatch, with current liabilities exceeding current assets. Even in the 3-5 year maturity bucked, liabilities exceed assets.

15.1 17.0 17.6

19.0 19.3 21.8

27.1

31.5

DHFL REPCO PNBHF Can Fin LICHF HDFC IHFL GRUH

High cost-to-income ratio has pressurized return

ratios

PNB Housing Finance


Exhibit 34: Asset-liability management (INR b)


78

51 62

71 68

88

45

88

5 yr

Liabilities AssetsCurrent liabilities exceed current assets, thus causing

an ALM mismatch

PNB Housing Finance


Management team

Ms Usha Ananthasubramanian - Chairperson Ms Ananthasubramanian holds a BSc and a Master’s Degree in Statistics from the University of Madras and a Master’s Degree in Arts from the University of Mumbai. She has been the Managing Director and Chief Executive Officer of PNB since August 2015. Prior to that, she was the Chairperson and Managing Director of the Bharatiya Mahila Bank, and held the position of General Manager at Bank of Baroda. She also served as the Executive Director of PNB. She is a Director on the Board of PNB Metlife India Insurance Company Limited.

Mr Sanjaya Gupta - Managing Director Mr Gupta holds a BCom from Lucknow University and an MBA from Lucknow University. Previously, he served as the Country Head and CEO of the Prospective Mortgage Guaranty Business in India at AIG United Guaranty; as the National Product Head, Mortgages - Consumer Banking at ABN Amro Bank NV; and as the VP Mortgages at ABN AMRO Central Enterprise Services Private Limited.

Mr Jayesh Jain - Chief Financial Officer Mr Jain has been with PNBHF since August 2014. He holds a BCom and is a CA. He is a Fellow Member of the ICAI, and a Certified Information Systems Auditor and a Certified Information Security Manager from the Information Systems Audit and Control Association, USA. Previously, he served as the CFO of GRUH Finance Limited for 13 years and has 15 years of experience in the housing finance industry.

Mr Shaji Varghese - Business Head Mr Varghese has been with PNBHF since February 2012. He holds a Bachelor’s Degree in Law from the Bharati Vidyapeeth New Law College, University of Pune. He also holds a Diploma in Business Management from the Bharati Institute of Management, University of Pune. He holds a Master’s Degree in Management Science from the University of Pune. Prior to joining PNBHF, he was Senior VP at IndusInd Bank.

PNB Housing Finance


Key risks

Slowdown in real estate demand could hamper growth PNBHF has grown at a CAGR of 60%+ over the past four years to become the fifth-largest HFC in India. Such high growth was possible due to small size and rapid geographic expansion. However, with a larger portfolio now, growth could slow down, especially is there is a slowdown in real estate demand. Besides, growing competition from banks and other HFCs could also hamper growth and put pressure on margins.

Loan portfolio is largely unseasoned The company enjoys a superior GNPA of 0.2%. However, this is also due to the fact that it has grown very fast in the past two years. As a result, the portfolio is not fully seasoned to reflect true asset quality. If PNBHF loosens underwriting standards to deliver strong growth, this could also impact asset quality.

Ongoing NHB inspection could pose problems In 2015, NHB conducted an inspection and identified certain deficiencies, including overstatement of net owned funds, failure to maintain required liquid assets in terms of provisioning, shortfall in creation of floating charge, issues in maintenance of deposit control account, LTV for certain loans beyond NHB norms, non-compliance with credit concentration norms, non-classification of certain loans as NPA and non-compliance with policy circulars issued by the NHB, to which the company is currently in the process of responding. If it is unable to resolve these deficiencies to the NHB’s satisfaction, it could pose problems in the future.

PNB Housing Finance


APPENDIX: Industry overview

Housing finance companies (HFCs) are operating in a structural growth market India has amongst the lowest penetration of mortgages worldwide (9% compared to

60%- 100% for developed economies and 20% for China Acute shortage of housing coupled with increasingly nuclear family dynamics, growing

middle class income will ensure healthy growth. Structural factors coupled with safest asset class will ensure +20% growth for

mortgage industry in near to medium term

Housing finance in sweet spot The housing finance industry remains in a sweet spot, with several key drivers such as favorable demographics (a young population; median age of 26 years), large unmet housing demand, low urbanization, low mortgage penetration versus global peers, and improving affordability. Moreover, with falling inflation and wage inflation staying steady, affordability will only go up in the next couple of years.

The government's particular focus on housing-for-all should sustain the housing sector for the next decade. Its thrust on affordable housing, enhanced tax incentives on home loans and lower risk weights for affordable housing loans up to INR3m bode well the housing finance industry.

As per the Planning Commission, formal mortgage financing penetration is less than 10%; the remaining 90%+ comes from informal sources and own funds. We believe that with improving land records, greater focus on the self-employed segment, and deeper reach of HFCs in rural areas, financing penetration will increase.

Favorable demographics Housing finance companies (HFCs) are operating in a structural growth market; India Has amongst the lowest penetration of mortgages worldwide (9% compared to 60%- 100% for developed economies and over 20% for emerging economies like China, Indonesia etc.), increasingly nuclear family dynamics, acute shortage of housing, low financing penetration, growing middle class income and improving affordability are some of the key factors that will ensure a healthy growth for housing finance industry. With multiple structural factors in place coupled with the fact that housing has emerged as the safest asset class the housing finance market to continue to grow at a CAGR 20% over the medium term.

The government’s thrust on housing, enhanced tax

incentives on home loans, and lower risk weights for

affordable housing loans up to INR3m bode well for the

housing finance industry

PNB Housing Finance


Exhibit 35: India is one of the world’s youngest nations


Mortgage penetration Mortgage penetration has improved from 2% of GDP in 2002 to 9% of GDP in 2010, it remains at very low levels compared to other developed and emerging markets Mortgage penetration levels (mortgage loans as percentage of GDP) in India, which had risen from around 2% as in March 2002 has increased fourfold to 9% over last decade.

Exhibit 36: Mortgage penetration in India is low


Exhibit 37: Mortgage penetration in rural areas is significantly below urban areas

Source: MOSL, Company, CRISIL research

45 43.7 42.8 40.7 39.7 39.6 38.5 37.9 37.5 37 36.9 35.2 33.7 30.5 27.9 28.4 25.9

Japa

n

Ger

man

y

HK

Cana

da

Fran

ce

Sing

apor

e

Russ

ia

Kore

a

Aust

ralia

Taiw

an US

Chin

a

Thai

land

Braz

il

Indo

nasi

a

Wor

ld

Indi

a

Median Age (Years)

9 18 20

32 36 40 45 45

62

81 94

Indi

a

Chin

a

Thai

land

Mal

aysia

Sout

hKo

rea

Taiw

an

Hong

Kong

Germ

any

USA U

K

Denm

ark

7.6 7.8 7.9 8.2 8.3 8.4 8.6 10.3

34.3 35.8 37.1 39 41.2 41.5

42.2 47.5

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY20E

Rural Urban

Despite a fourfold increase in mortgage penetration from 2% to 9% over last

decade; India has lowest penetration levels among the developing countries

Significantly lower mortgage penetration in

rural areas

PNB Housing Finance


Increasing urbanization Despite a steady increase in urbanization India urban population stands at 31% which is far lesser than the other developing countries. Over the last decade while the overall population growth stood at 1.4% the urban population grew at 2.5%. This trend is expected to continue and as per the estimates of the Planning Commission approximately 300 million people will migrate to Indian towns and cities thereby creating huge demand for housing. The rapid increase in urbanization has led to strong growth for housing, the pace of urbanization is expected to accelerate as the country sets to a more rapid growth. Surging growth and employment in cities will prove a powerful magnet.

Exhibit 38: Urbanization share to reach 45% by 2030


Exhibit 39: India is least urbanized among EM peers


Cultural shift and urban migration leading to Nuclear families structure Due to cultural shift the household size is shrinking and nuclear families becoming popular, which bodes well for housing demand. While it is often driven by employment-related migration, largely to urban areas, and impacts the housing demand in a manner similar to urbanisation. While nuclearization reduces the area per household but the overall household formation rises, thereby increasing the demand for housing units. With increasing financing penetration the individual finds it easy to leverage his future cash flow streams. This phenomenon has played out in metro cities and the trend is increasingly becoming popular in semi-urban areas

Acute shortage of housing Despite strong growth in housing supply in recent years, India still faces a shortage of houses, especially in urban areas. As per the Report of the Technical Group on Urban Housing Shortage for the 12th Five Year Plan, housing shortage is defined as the number of households that would not have acceptable dwelling units or no dwelling unit to live in at the beginning of the 12th Five Year Plan. The housing shortage in urban India was estimated to stand at 18.78 million units, as of March 1, 2012, as shown in the table below. This massive shortfall especially in urban areas has been driving the demand. Housing conditions and Urban Slums with usual inputs like obsolescence factor, congestion factor & homeless households.

HFCs gaining share from banks Total outstanding housing loans (including LAP) as at September 30, 2015 were estimated to be INR11.3t, an 18% increase since FY11. IMaCS forecasts that the housing finance market in India will grow 20-22% over FY15-20.

17.29 17.9719.91

23.3425.71

27.8131.16

1951 1961 1971 1981 1991 2001 2011

Urbanization Share (%)

31

4554

78 8287

India China Indionesia Mexico South Korea Brazil

India China Indionesia Mexico South Korea Brazil

Over the last decade while the overall population

growth stood at 1.4% the urban population grew at

2.5%

While urban housing shortage stands at 19mn

unit the housing shortage in rural areas is 43mn units

PNB Housing Finance


Banks held an estimated 63% share of the housing finance market in FY15, based on loan assets. The higher market share of banks as compared to HFCs can be attributed to extensive networks, broad customer bases and access to stable low-cost funds. HFCs have steadily gained housing finance market share from banks, having increased their share from 31% in FY12 to 37% in FY15. Despite banks showing continuing growth in their lending portfolios, HFCs are able to gain market share due to better access to customers in non-metro cities, strong origination skills, focused approach, and customer service orientation, among others.

Exhibit 40: Trend in total outstanding housing loans (including LAP)

Source: MOSL, Company, CRISIL research

The recent slowdown in corporate credit has led to commercial banks aggressively focusing on the housing finance market and competing with HFCs. Despite this, HFCs’ market share is expected to remain steady. CRISIL predicts that mid-size HFCs (those with total outstanding retail housing loans of less than INR300b) will record a CAGR of 27-29% over FY15-17. However, large HFCs will grow at a slower CAGR of 17-19% during the same period. Mid-size HFCs are expected to grow at a higher rate because of their focus on affordable housing projects and their relatively higher concentration in tier-II and smaller cities, where growth has been higher over FY15. CRISIL expects housing loan disbursements to grow at a CAGR of 19-21% to reach INR8.3t by FY20, aided by mortgage penetration, higher average ticket sizes and demand for affordable housing.

Housing has emerged as the safest asset class Housing finance has emerged as the safe heaven across the entire lending space in India, with minimal problems from bad loans (Less than 1% gross NPL compared to more than ~5% for banking system), despite challenging conditions, with interest rate rises and slowing economic growth. The key reasons for this are: a) the affordability index for Indian borrowers has improved b) the majority of housing loans have been used for self-occupied houses rather than investments, and for sentimental reasons as well as reputational, self-occupied houses are the last thing an Indian would default on. The continued existence of these conditions would ensure that future bad loans will remain low in the sector and would remain below 1%. Indian mortgage market has a current size of over INR +12tn (~14% of total banking system). Despite this size, the mortgage market is highly underpenetrated (9% mortgage to GDP is lowest among peer countries) moreover several socio-economic factors will support medium to long term opportunity.

4.9 5.6 6.5 7.8 9.1 10.4

12.1 14.1 2.2 2.8 3.6

4.3 5.3

6.2 7.4

8.8

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Banks HFCs

HFCs have gained market share from banks in the

past five years due to better reach in non-metro

locations, strong origination skills and better customer

service

CRISIL estimates housing loan disbursements to grow at 19-21% CAGR over FY15-

20

PNB Housing Finance


Financials and Valuations

Income statement Y/E March 2012 2013 2014 2015 2016

Interest Income 4,435 6,346 10,559 16,708 25,441 Interest Expended 3,144 4,620 8,016 12,648 18,603 Net Interest Income 1,291 1,727 2,543 4,060 6,838

Change (%) 33.7 47.3 59.6 68.4 Other Operating Income 175 317 644 1,095 1,555 Net Income 1,466 2,044 3,187 5,155 8,393

Change (%) 39.4 56.0 61.8 62.8 Operating Expenses 347 631 1,093 1,830 2,539 Operating Income 1,119 1,412 2,094 3,326 5,854

Change (%) 26.2 48.3 58.8 76.0 Provisions/write offs 63 125 304 381 811 PBT 1,056 1,287 1,790 2,945 5,043 Tax 282 359 493 1,004 1,767 Tax Rate (%) 27 28 28 34 35 Reported PAT 774 928 1,297 1,941 3,276

Change (%) 19.9 39.7 49.6 68.8 PAT adjusted for EO 774 928 1,297 1,941 3,276

Change (%) 19.9 39.7 49.6 68.8 Proposed Dividend 77 120 176 290 486

Balance sheet Y/E March 2012 2013 2014 2015 2016

Capital 300 500 657 1,038 1,269 Reserves & Surplus 3,699 5,680 8,684 14,749 20,175 Net Worth 3,999 6,180 9,341 15,787 21,445

Borrowings 25,731 40,620 64,881 126,776 228,167 Borrowings 38,597 66,954 101,077 164,808 260,137

Change (%) 73.5 51.0 63.1 57.8 Other liabilities 1,767 3,417 4,978 9,758 15,144 Total Liabilities 44,363 76,551 115,396 190,352 296,725

Loans 39,487 66,008 105,660 168,006 271,813 Change (%) 67.2 60.1 59.0 61.8

Investments 3,783 7,769 6,455 15,860 16,223 Change (%) 105.4 -16.9 145.7 2.3

Net Fixed Assets 46 142 258 396 581 Total Assets 44,363 76,551 115,396 190,352 296,725

PNB Housing Finance


Financials and Valuations

Ratios

Y/E March 2012 2013 2014 2015 2016

Spreads Analysis (%) Avg Yield on Housing Loans 10.6 11.5 11.7 11.7 11.2 Avg. Yield on Earning Assets 10.2 10.8 11.4 11.3 10.8 Avg. Cost-Int. Bear. Liab. 8.1 8.8 9.5 9.5 8.8 Interest Spread 2.1 2.1 1.8 1.8 2.0 Net Interest Margin 3.0 3.0 2.7 2.7 2.9

Profitability Ratios (%) RoE 18.2 16.7 15.4 17.6 RoA 1.54 1.35 1.27 1.35 Int. Expended/Int.Earned 70.9 72.8 75.9 75.7 73.1 Other Inc./Net Income 11.9 15.5 20.2 21.2 18.5

Efficiency Ratios (%)

Op. Exps./Net Income 23.7 30.9 34.3 35.5 30.2 Empl. Cost/Op. Exps. 44.4 40.3 37.0 36.6 29.7

Asset Quality (%)

Gross NPAs 371 337 341 598 Gross NPAs to Adv. 0.6 0.3 0.2 0.2 Net NPAs 164 114 381 Net NPAs to Adv. 0.2 0.1 0.1

PNB Housing Finance


N O T E S

PNB Housing Finance


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26 September 2016 Company Update | Sector: Financials PNB ... … · such as loan processing,...

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