26 september 2016 company update | sector: financials pnb ... … · such as loan processing,...
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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.
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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%
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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
Source: MOSL, Company
Exhibit 3: Retail home loans constitute 61% of total portfolio
Source: MOSL, Company
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 (%)
Source: MOSL, Company
Exhibit 5: Loan mix by geography (%)
Source: MOSL, Company
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
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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
Source: MOSL, Company
Exhibit 7: Share of developer loans in total loan book
Source: MOSL, Company
Exhibit 8: Customer segment mix (%)
Source: MOSL, Company
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)
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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)
Source: MOSL, Company
Exhibit 10: LTV at origination (%)
Source: MOSL, Company
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
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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
Source: MOSL, Company
Exhibit 12: 43% PAT CAGR over FY12-16
Source: MOSL, Company
Exhibit 13: FY12-16 loan book CAGR – best among peers
Source: MOSL, Company
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
FY12 FY13 FY14 FY15 FY16
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
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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
Source: MOSL, Company
Exhibit 15: Trend in other operating expenses
Source: MOSL, Company
Exhibit 16: Advertising and loan acquisition grew at 87% CAGR over FY12-16
Source: MOSL, Company
154 254 404 671
753
65 59
66
12
FY12 FY13 FY14 FY15 FY16
Employee expenses (INR m) Growth (%)
193 377 689 1,159 1,786
96 83
68 54
FY12 FY13 FY14 FY15 FY16
Other Opex (INR m) Growth (%)
9 22 55
118
231
23 71
190
308
515
FY12 FY13 FY14 FY15 FY16
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.
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PNB Housing Finance
26 September 2016 8
Exhibit 17: Cost-to-income ratio (calculated) improved in FY16
Source: MOSL, Company
Exhibit 18: Cost-to-income ratio (calculated) is elevated compared to peers
Source: MOSL, Company
23.7 30.9 34.3 35.5 30.2
0.8
1.0 1.1
1.2
1.0
FY12 FY13 FY14 FY15 FY16
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
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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
FY12 FY13 FY14 FY15 FY16
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
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PNB Housing Finance
26 September 2016 10
Exhibit 21: Share of market borrowings and public deposits versus peers
Source: Company, MOSL
Exhibit 22: Both yields and CoF trending lower; marginal expansion in spreads
Source: MOSL, Company
Exhibit 23: Net interest margin expanded 4bp over FY14-16
Source: MOSL, Company
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
Source: Company, MOSL
Exhibit 25: Margins (FY16) are lower than most peers
Source: Company, MOSL
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
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PNB Housing Finance
26 September 2016 11
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
Source: MOSL, Company
Exhibit 27: GNPA as of FY16 (%) – Best-in-class asset quality
Source: MOSL, Company
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
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PNB Housing Finance
26 September 2016 12
Exhibit 28: Fee income to Total Income (FY16) – Comparison with peers
Source: MOSL, Company
Exhibit 29: Return ratios have picked up in FY16, but still remain lower than peers
Source: MOSL, Company
Exhibit 30: RoA (FY16, %) lower than peers
Source: MOSL, Company
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
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PNB Housing Finance
26 September 2016 13
Exhibit 31: As a result, RoE (FY16, %) lower than peers
Source: MOSL, Company
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
Source: MOSL, Company
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
Source: MOSL, Company
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
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PNB Housing Finance
26 September 2016 14
Exhibit 34: Asset-liability management (INR b)
Source: MOSL, Company
78
51 62
71 68
88
45
88
5 yr
Liabilities AssetsCurrent liabilities exceed current assets, thus causing
an ALM mismatch
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PNB Housing Finance
26 September 2016 15
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.
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PNB Housing Finance
26 September 2016 16
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.
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PNB Housing Finance
26 September 2016 17
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
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PNB Housing Finance
26 September 2016 18
Exhibit 35: India is one of the world’s youngest nations
Source: MOSL, Company
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
Source: MOSL, Company
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
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PNB Housing Finance
26 September 2016 19
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
Source: MOSL, Company
Exhibit 39: India is least urbanized among EM peers
Source: MOSL, Company
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
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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
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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
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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
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N O T E S
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