PNB Housing Fin - Fast Growing HFC


I like to use Spread and capitalization levels, rather than NIM. Spread is the difference in borrowing and lending RATES, and hence, not affected mechanically by Equity/Debt ratio of the lender. But,

NIM = (Interest Income – Interest Expense)/Asset
= Lending Rate – (Borrowing Rate * Debt)/Asset, since Interest Expense = Borrowing Rate * Debt
= Lending Rate – Borrowing Rate * (1 - Equity/Asset), since Debt = Asset – Equity
= (Lending Rate – Borrowing Rate) + Borrowing Rate * (Equity/Asset)
= Spread + Borrowing Rate * (Equity/Asset)

On writing the basic equations, it looks like the difference between Spread and NII depends on not only the capitalization levels but also the Borrowing Rate. When the spread and Equity/Asset are same for two Lenders, higher a Borrowing Rate mechanically results in a higher NIM.

For example, consider two lenders A and B with same Equity/Assets, Compared to B, A lends to somewhat riskier borrowers. As a result, A has both lending and borrowing rates higher by 1%. To summarize, A and B have the same spread and same capitalization levels but A is in riskier business. In this example, A will have higher NIM, because it has higher borrowing rate. I would rather prefer to invest in B, while NIM will point to A. (You can replace A and B with Repco and Gruh three years earlier.)

NIM is not used in the US; it looks more like an Indian innovation.

(Amitayu) #292

Spread is more meaningful and important as NIM is dependent on Tier-1 Capital and Gearing Ratio which can be altered


Latest PNB HF Presentation:

Details ALM, NIM, Spread etc. There is a gradual shift to Non-Housing Loans as well as increasing pie of non-salaried loans (Self Employed & Corporate) in loan book segmentation.

(Peabody) #294

The scrip is being hammered continuously. Apart from having an unfortunate parent- Is there something else gone wrong which market knows. Invested at 1500 levels.

(Mike) #295

PNB partially exited the stock and that hammered the sentiments. then the mkt has been in decline… technically the stock is weak in any case from price action point of view …

may be the international shareholder or PNB wish to exit (remember PNB has only 20% locked in …rest they can sell) …and that will also exert more pressure on the counter and gains will be capped… good to avg out in my view as it will take a long time to reach 1500 again in my view … I am long term super bullish on the counter. Holding for 5 yr view…

(Rushil) #296

Which international shareholder wants an exit? Any source for this

(ricky76) #297

Pranav- your conclusion on increasing in borrowing rates increasing NIM is incorrect.

In your last equation if you increase borrowing rate , it would also lower the spread, the net effect would be a lower NIM not a higher one.


When the spread and Equity/Asset are same for two Lenders, higher a Borrowing Rate mechanically results in a higher NIM.

An increase in borrowing rates does not increase NIM but decreases it. The increase in borrowing rates increases the difference between NIM and Spread.

Another way to understand could be: 1% increase in borrowing rate decreases spread by 1% but NIM by (1- (Equity/Asset))% only. The divergence between NIM and spread would be higher for the well-capitalized lenders.

(Rejinoldo) #299

Carlyle would want to exit. They are holding for four plus years. Normally 5-6 is the max that a pe. vc will hold on to.

(Jaclyn) #300

Happened to read through E-MTN offer document by PNB Hsg. Found several nuggets of information which I found useful. For posterity and benefit of participants in this thread, I post it here. It is a long post, but definitely lighter than the 415 page document I browsed through. :grinning: Hope you find it useful. It is pure cut and paste job of interesting portion only.
Our total loan portfolio grew at a CAGR of 51.36% from 168,193.17 million as of 31 March 2015 to 385,313.46 million as of 31 March 2017, and was 552,957.70 million as of 31 December 2017. Our outstanding deposits (net of maturities) grew at a CAGR of 42.80% from 48,974.26 million as of 31 March 2015 to 99,870.90 million as of 31 March 2017, and were 106,684.72 million as of 31 December 2017. Similarly, our revenue from operations grew at a CAGR of 48.31% from 17,767.26 million in Fiscal Year 2015 to 39,078.32 million in Fiscal Year 2017, and was 39,467.60 million in the nine months ended 31 December 2017. Our network has also expanded from 32 branches and 14 processing hubs as of 31 March 2014 to 80 branches and 21 processing hubs as of 31 December 2017.
One of the measures through which we analyse our financial performance is net interest income, or NII, which represents our total interest income less total interest expense (including brokerage on deposits, but excluding loan origination costs). Our NII was 187.05% of our profit after tax in the nine months ended 31 December 2017.
As of 31 December 2017, 29.63% and 70.37% of our loan portfolio were fixed and variable interest rate loans, respectively.
As our loan portfolio has grown, our gross NPAs have also increased and were 2,304.51 million, 857.73 million, 598.08 million and 341.35 million as of 31 December 2017 and as of 31 March 2017, 2016 and 2015, respectively, but were 0.42%, 0.22%, 0.22% and 0.20%, respectively, as a percentage of our total loan portfolio as of those dates. One of the effects of our recent growth is that a significant portion of our loan portfolio is relatively new.
As of 31 December 2017 and as of 31 March 2017, 2016 and 2015, our provisioning coverage ratio (i.e., reflects the ratio of provisions created for NPAs, standard assets and provisions for contingency to gross NPAs), was 175.11%, 303.38%, 295.34% and 295.17%, respectively, and our net NPAs, as a percentage of our total loan portfolio, were 0.33%, 0.15%, 0.14% and 0.07%, respectively.
One of the effects of our recent growth is that a significant portion of our loan portfolio is relatively new. As of 31 December 2017, approximately 77.14% of our total loan portfolio had a tenure of less than 24 months since the first disbursement. We believe that the risk of delinquency in housing loans typically emerges 18 to 24 months from disbursement. As a result, there can be no assurance that there will not be a significant increase in the proportion of our loans that are classified as NPAs as our loan portfolio matures. Further, negative trends or financial difficulties could unexpectedly increase delinquency rates and we could also reach a point in the future where we may not be able to expand our portfolio at high growth rates without allowing the overall credit quality of our loans to deteriorate.
The NHB Directions currently permit HFCs to borrow up to 16 times
their net owned funds (NOF)
. As of 31 December 2017, we had total borrowings of 507,509.95 million, or approximately 9.01 times our NOF (56,321.30 million).
Furthermore, under the terms of the License Agreement, PNB will have the right to terminate the license if its shareholding in our Company falls below 30.00% of our outstanding equity share capital. There can be no assurance that PNB will not exercise its right to terminate the license under the terms of the License Agreement in the event its shareholding falls below 30.00%.
Similarly, pursuant to the NHB Directions, HFCs accepting deposits are currently required to comply with a statutory liquidity ratio (SLR), or a minimum percentage of their deposits that they are required to maintain in the form of approved investments, of 12.50%. Under these requirements, 6.50% of their deposits must be held in approved unencumbered securities and the additional 6.00% of their deposits may be held in either approved unencumbered securities or fixed deposits.
Certain key measures taken by the RBI to assist in fulfilling the Government’s objectives include the reduction in risk weights applicable for affordable housing loans for the purpose of calculation of CRAR and allowing HFCs to raise long-term ECBs for on-lending towards affordable housing, which the RBI defines as housing loans with a size of up to 2.50 million.
For instance, under the NHB Directions, we are only allowed to mobilise deposits up to five times of our NOF. As of 31 December 2017, our deposits amounted to 1.89 times our NOF (56,321.30 million). Further, we are not allowed to accept or renew any deposit which is repayable on demand or on notice, or which is for a tenure of less than one year or more than 10 years or which pays interest at a rate exceeding 12.50% per annum.
The NHB provides refinance for certain qualifying loans at significantly reduced rates to certain qualifying HFCs pursuant to various rural and affordable housing schemes of the Government. In order to access NHB refinance, we are required to lend to certain select customers in the low and middle income segments in rural and urban parts of India. As of 31 December 2017, our outstanding refinancing from the NHB was 25,701.73 million. In the nine months ended 31 December 2017 and in Fiscal Years 2017, 2016 and 2015, we were disbursed 0.00 million, ₹10,000.00 million, ₹9,000.00 million and ₹10,100.00 million, respectively, under various refinancing schemes of the NHB.
In the nine months ended 31 December 2017 and in Fiscal Years 2017, 2016 and 2015, we sourced 65.65%, 59.47%, 55.00% and 53.07%, respectively, of new loans from our in-house channels.
We have made, and expect to continue to make, investments in personnel and our technology platform to allow us to expand our loan portfolio. In particular, we have invested 355.00 million in developing, acquiring and implementing our new integrated technology platform, “enterprise system solution” (ESS) as well as in recruiting and training our personnel, as well as in the related back-up systems. The new ESS platform was launched recently and is expected to be useful for improving our technology in areas such as lead management, loan origination, loan management, collections and collateral management, deposits, customer service and integrated accounting. One of the consequences of implementation of our ESS is that our loan originations process has become increasingly dependent on our ability to adopt technological changes, such as our ability to process applications over the internet, accept electronic signatures, provide process status updates instantly and provide other customer-expected conveniences.
For the nine months ended 31 December 2017 and Fiscal Year 2017, 83.76% and 77.83%, respectively, of housing loans to salaried customers had a TAT of three days (the benchmark we use for salaried customers) and 80.47% and 72.04%, respectively, of housing loans to self-employed customers had a TAT of seven days.
The operational efficiencies that we derive from our new operating model have also helped us reduce our *cost to income ratio, which was 22.43%, 25.15% and 30.87% in Fiscal Years 2017, 2016 and 2015, respectively. Our cost to income ratio was 18.32% in the nine months ended 31 December 2017, during which time we continued to expand our business through the opening of additional branches and expect to realise additional operational efficiencies as those businesses develop.
We undertake rigorous credit appraisal and verification processes to manage the risks associated with selfemployed customers and only lend to self-employed customers that are able to provide formal proof of income. However, we are able to charge self-employed customers interest rates that are higher than what we offer to salaried customers, which means that we can realise relatively higher yields from these loans to the extent the additional risk can be managed.
We believe that the quality of our credit underwriting, monitoring and collection processes is further evidenced by the outcome of the “PNB Housing Finance Ltd – Issuer Profile” sought from CRISIL Ratings, according to which the percentage of “gross NPAs (2 year lagged)” of our portfolio as of 31 March 2017 was 0.5%, compared to an industry average of 1.2%. (Source: CRISIL Ratings – PNB Housing Finance Ltd – Issuer Profile, February 2018.)

(Jaclyn) #301

While reading this paragaraph I found it interesting at the beginning, then scepticism arose and finally ended up in confusion as I finished the paragraph.

Further, the Indian tax laws currently allow HFCs to claim a tax deduction up to 20.00% of profits from the provision of long-term finance for the construction or purchase of houses in India. Pursuant to Section 36(1)(viii) of the (Indian) Income Tax Act, 1961 (the Income Tax Act), up to 20.00% of profits from housing finance activities may be carried to a special reserve and will not be subject to income tax. We utilised the maximum amount of this allowance in Fiscal Years 2017, 2016 and 2015 by transferring 950.00 million, 584.00 million and 311.00 million, respectively to a special reserve. As of the beginning of Fiscal Year 2018 (i.e., 1 April 2017), the balance in our special reserve was 3,347.60 million. However, there can be no assurance that the Government will continue to make this fiscal benefit available to HFCs and we might be subject to increased taxes if such benefit ceases to become available, which may in turn have an adverse effect on our business, financial condition and results of operations. In Fiscal Year 2015, the NHB issued a circular requiring all HFCs to create a provision for deferred tax liability (DTL) on the total amounts transferred to special reserves pursuant to this tax provision, including those transferred in the previous years, irrespective of whether the HFC intended to withdraw such amounts from the special reserves. The NHB has advised HFCs to create DTL in respect of the accumulated balance of special reserves as at 1 April 2014 from free reserves in a phased manner in the ratio of 25:25:50 over a period of three years, starting with Fiscal Year 2015. Accordingly, we created 25.00% of DTL on the opening balance in our special reserve of 1,502.58 million as at 1 April 2014, which was equal to 127.68 million at the end of Fiscal Year 2015 and 132.33 million at the end of Fiscal Year 2016. We created the remaining 50.00% of DTL equal to ₹260.00 million at the end of Fiscal Year 2017. Separately, the DTL on the amount in special reserve appropriated out of our profits for Fiscal Years 2015, 2016 and 2017 and in the nine months ended 31 December 2017 was 105.71 million, 204.03 million, 310.09 million and 374.37 million, respectively, which was also taken into account to determine the effective tax rate for those periods. The effective tax rates for the nine months ended 31 December 2017 and for Fiscal Years 2017, 2016 and 2015 were 34.83%, 34.86%, 35.11% and 33.07%, respectively, after taking into account the effect of DTL, in turn adversely affecting our profit after tax.

(Rushil) #302

Is there a possibility of license being cancelled when they have around 60k crore of assets? I mean this doesn’t seem likely?
Hope someone with experience can help me out here.


(satyajeet18) #303

I think here , licence refers to the permission for usage of brand “pnb”, not the hfc license.

(abhishkjain2626) #305

Even if PNB’s stake in pnbhf falls below 30%, why would they cancel pnbHF’s right to use the PNB tag? Obviously it is in PNB’s interest to allow the tag (a very very popular one at that) and let business go on as usual and keep collecting the (hopefully ever increasing) dividends…

Disc- 20% of my PF

(abhishkjain2626) #306

the above figures are for 9M fy18. Canfin’s ratios are very good. Can PNB HF reach there? finance costs are similar, C/I is expected to fall going forward. Another thing I couldn’t understand is that despite having higher share of non-housing assets which are higher yielding, PNBHF’s average loan yield - 10.12% is lesser than Canfin’s (which has very high housing loans, that too salaried class) 10.39%… Going forward, I guess most people agree that PNBHF’s ROEs are posed to rise, which means even higher growth rates than the ROE, compared to Canfin which is most probably going to have stable ROE. Canfin at 5.5 P/B, vs PNB HF at 3.1 P/B.

Presently PNBHF’s ratios are where canfin’s were in 2014 :blush:


Am I missing out on something???

(Rushil) #307

Just my 2 cents here.
I think lenders are so complicated that one is best suited to just try and understand the management’s capability and how much you trust them.
If our horizon is truly long term only the managerial prudence will really matter. Ratios can simply change too quickly for them to be reliable.
For me the greatest factor pointing towards management quality and processes in place at pnb housing is the interest shown by General Atlantic and by Mr. Raamdeo Agarwal. Also Carlyle has a long history of adding value to its financial industry bets. This along with the experienced management is what drew me to pnb.

Dis-Invested and very biased

(MD RH) #308

If 5-6 years is the timeframe that means Carlyle will not exit before 2021.

(asterix) #309

The article mentions that NBFC was valued at $500M. Isn’t this a low valuation compared to current market price? The current Mcap of 19629 Crs translates roughly to $3000M and hence, I am a little confused if I missed something here.

(Susindar) #310

Yes, you missed the date of the article. I think it was in 2015.

(asterix) #311

Thank you. I missed the date and this was during pre-IPO times. Just going by the numbers, between 2015 to now, the company has grown 6x as the current Mcap is around $ 3000M… Impressive indeed