PNB Housing Fin - Fast Growing HFC

(Julian) #491

How about National Housing Finance Corporation (NHFC) or Kotak Housing Finance Corporation (KHFC)? As per SEBI regulations, open offer will have to be made, if the acquisition is above 25%. At these prices, any strategic investor would be interested to buy in full, the fastest growing large HFC in the country, with decades of growth ahead, (as described by Sanjaya Gupta in Q4 2017 conference call) with such scale of opportunity. The management’s hunger for growth is clearly evident in its plans to get equity capital to the tune of 8000 crores (by which they will be able to take 1 lakh crore of debt). Sanjaya Gupta has said that they will like to take equity once every three years showing his hunger for growth. Extrapolating this, we are talking about a 10 lakh crore market cap in 10 years, easily making it the second or third biggest company in India after HDFC. Vaidyanathan of Capital First in a recent interview said that Housing Finance is actually 50% of the indian banking business and that’s where they would like to concentrate on.
Disclosure: Heavily invested

(Yogesh Sane) #492

Businessmen in India prefer to build businesses from scratch than to buy them from market unless they are selling at distressed valuation or there are some synergies like cost optimization, cross-selling opportunities, new markets, new products, patents, key personnel, brands etc. I don’t see any of that can be a big factor for a potential acquirer in PNB housing.

Cultural mismatch is a big issue in any acquisition in India as businesses built from scratch reflects the DNA of the promoter and fitting an outside business into an existing group is like doing a major transplant operation.

Both Piramal and Bajaj Finance are building home loan businesses from scratch when they have the financial muscle to buy a readymade business like PNB Housing or Canfin. Valuation at which their stock is selling, such an acquisition will be immediately accretive but they are building a business from zero as it cost them just the book value rather pay 3-4 times book value for an existing business. Costs exceeds benefits.

Growth in housing finance companies is a result of industry tailwinds so even a new player will grow. Industry is large enough to have more players. Lot of business comes though DSAs so a new player might use an existing pool of agents to get started and then slowly switch to on-roll employees.

Just some musings about the industry.

(Julian) #493

The experience of Aspire Housing finance shows that developing the business from scratch is not such an easy job. The top 5 housing finance companies have already cornered 85% of the market and with their strong credit ratings and advantages of scale it is difficult for a new player to break into the market. PNB housing will still add value to an acquirer like Kotak. That 51% is going to be sold at one go is an indication that a buyer is ready. And dont forget that it took 30 years for PNB Housing to reach the position of the 5th largest Housing Finance company.

(Ronak) #494

Arjun, u are correct… Just to elucidate for the benefit of members, let’s logically think of when do companies have higher nims

Nim = yields (-) [ int paid / Avg Int. Earning Assets ]

So Logically speaking

  1. High Yields will increase NIM’s. Meaning, companies having higher exposure to High yielding Non Housing Finance segment, like construction finance, LAP, LRD etc will tend to have higher yields and therefore higher NIM’s. Also, loans to Non Salaried segment are higher yields.
    (Repco Home, DHFL come to mind). Surprising that PNB HF has a very high exposure to Non Housing Finance segment and Non salaried segment but has very low overall yields.
    That is one of the reason why street finds their portfolio risky. However, reported numbers so far have shown no stress.

  2. Lower Int. paid will result in Higher Yields. This has to do with 2 things
    a. Lower Absolute borrowings - Companies which have a high share of Retained Earnings and Reserves will prefer deploying them first before resorting to borrowings. Hence, the companies which have been in business and have grown stupendously will tend to have high Reserves and retained earnings and therefore have lower absolute borrowing (HDFC). Pls note that fast growing companies will resort to higher borrowings to meet their loan growth and will therefore have a high absolute borrowing (PNB HF)

  3. Lower cost of borrowing will also result in Lower Absolute Int.
    Here the credit ratings have a major role to play. HDFC has highest safety rating from all rating agencies. PNB HF is still at AA+

  4. Higher Int. earning assets.
    This is the key. How effectively one can park the funds into int. earning assets. What % of total earning assets are earning int.
    Companies in growth phase will have to invest in setting up branches, locations, Furniture and Fixtrues, IT Systems which will involve capex which are not generating int. Once the branches mature and business starts pouring in - incremental investment in these assets fall down and int, earning assets increase.

PNB HF has setup lot of branches and hubs in the recent past. It’s last concall still speaks of adding 1 lakh sqft of office space in FY 19. So, it’s investments into these F. assets will be high, pressurizing NIM’s. HDFC has a well established setup and incremental branch expansion is not so aggressive. Hence, higher portion of Int. generating assets. Mind you, HDFC has also other int. like HDFC Bank, where it recently added exposure, which are not int. generating assets. It only pays dividend, (Though markets capture it in it’s valuation after giving some holding co discount).

(Julian) #495

India’s biggest ever quarterly bank profit for Punjab National Bank in Q2 2018 on sale of PNB Housing stake.


the only NBFC which can absorb this elephant is Bajaj Fin without diluting its promoter holding a lot. Kotak can do it if they want a faster and efficient way to comply promoter holding norms.

(Julian) #497

PNB management is selling their house (PNB housing finance) to save the furniture (bank). After doing all the right things with PNB housing, they are now planning to sell the family silver. If any astute investors were in the bank or Govt. they would never permit it. Market news is that the bank is not happy with the present market price and willing to wait for a better price. The only intention of Carlyle in selling seems to avoid being in management control and making open offer.

PNB Housing Finance Ltd.: PNB appoints i-bankers for stake sale in housing arm - The Economic Times via @economictimes

Astute investors are buying PNB Housing Finance in the light of stake sale
Kunj Bansal: Kunj Bansal on why he has put his money in PNB Housing - The Economic Times via @economictimes

(Ar) #498

Hi Yogesh. Would it be possible to get your thoughts on how you think about steady state leverage levels for NBFC’s (not only in the context of PNB housing but in general). I was asking this in the context of what steady state ROE a NBFC business can generate which would be ROA* steady state leverage

As NBFC’s I believe are required to maintain 10% Tier 1 and 15% CRAR, this would mean risk weighted assets can be ~6.7x of capital (tier 1 plus 2) which would imply leverage of total assets (Total assets divided by net worth; or ROE divided by ROA) would be marginally higher say ~7-7.5x (depending on the kind of business the NBFC is in and hence the kind of risk weighted assets it has). Is this how one should think about it? Because based on this Bajaj Finance’s leverage looks lower at 5-6x (Total assets to equity) so they potentially further increase ROE by increasing leverage (though I guess practically they wouldn’t as they are more into unsecured lending so would be more conservative?)

sorry if this is slightly off topic

(Yogesh Sane) #499

Leverage levels depend on perceived risk in addition to the CAR requirements. Most of the NBFCs are well above required ratios because they think their portfolio is risky so they do not want to leverage it for the risk of being wiped out should there be an asset quality issue.

Leverage of PSU NBFCs is high because of moral hazard. They know that in the event of their equity getting wiped out, government will bail them out so they use leverage and lower NIMs to get an advantage over private NBCs.

Some NBFCs sell out part of their portfolios and they retain credit risk on sold out portfolio. Some NBFCs offer credit enhancements in the form of cash collateral to sold out portfolios. That’s another reason leverage is low.

PNB Housing has a higher leverage because their ROA is low and that’s because of low low NIM, high opex and high credit costs. Being backed by a PE may also be a factor. PEs encourage risk taking.

Bajaj finance has a low leverage because it has high ROA so they generate a decent ROE without taking risk. If and when their ROA drops, they can increase leverage to maintain ROE. They don’t see that need right now.

I hope this answers your question.

(Ar) #500

Thank you for the prompt reply Yogesh. I guess securitization/sell down would show up as lower leverage but can enhance ROE through higher interest spread/other income

I guess the only drawback to an NBFC (say Bajaj Finance) increasing ROE through leverage would be would be the lowering of NIMs as funding mix would have more borrowings rather than “free equity” so in effect might not be very ROE accretive. I guess end of the day higher ROA would always be the most “stable” or well regarded source of higher ROE

(ricky76) #501

Your comments on PNB housing don’t quite square with reality, please check your facts and reasoning.
• PNBs leverage/gearing ( assets/equity) is around 9X ( march 2018), hardly high, Gruh’s is around 11X
• PNB has consistently had a 2 year lagged NPA around half the levels of its peers so I don’t quite see how it can have high credit costs?
• PNB’s low NIMs reflect a low risk strategy not a high risk one, Gruh, Repco and India bulls for instance have far more concentrated and riskier portfolios.

(Yogesh Sane) #502

PNB housing’s leverage dropped only after IPO. Prior to that they had a high leverage of 13. With the growth they are projecting, I wouldn’t surprised if they go back to that level. Leverage is an indication of risk taking. I don’t think there is any change in their risk policy.

Credit cost and net NPA are related but needs to be interpreted differently. Credit cost is calculated using provisions made for NPA. So when a company makes a large provision, credit costs will be higher and net NPA will be lower. Gross NPAs depend on which assets company choose to write-off and which ones it chooses to keep on balance sheet in anticipation of upgrade or recovery. I pay more attention to credit costs and fresh additions to gross NPA than Net NPA.

Gruh also has a high leverage either because they think their asset quality is better or that HDFC will bail them out if they get into trouble. No one will bail out PNB Housing if they get into trouble.

(RamanTiwari) #503

An important element is missing in your reasoning Yogesh which is: Sector level risk, among NBFCs… Leverage of HFCs should be compared among HFCs not with other consumer lending.

Consumer lending/micro finance/SME lending are generally riskier segments and hence lenders have lower leverage and higher ROA.
HFCs are less riskier(by underlying asset) and hence lenders have higher leverage and lower ROAs

Loss given default is 15% for HFCs, 25% SME, 30% Four Weheeler and 50-55% in Two wheelers

(ricky76) #504
  1. You may want to go through their recent con calls to understand the level of gearing they are comfortable with and at what stage they would start raising capital. They are actually pretty conservative.

  2. Credit costs can well increase temporarily on increased provisions either to top up write offs or increase provision coverage but over time credit costs move in line with gross NPAs. This is banking 101. PNB has low NPAs relative to peers and hardly any write offs so unless the book deteriorates significantly they are unlikely to have high credit costs.

(Investor_No_1) #505

What is exact meaning of this statement can you pls elaborate? Do you mean that 50-55% of two wheeler loans will become NPAs in future? Also, from where you get this statistics? thanks

(Sunday) #506

It should mean 50 to 55 percent of the GNPA would be wiped out.

(butun) #507

Loss Given Default = (1 - Recovery %) for accounts that have defaulted


NPA typically defined as 90+ = 4 or more instalments missed

Contractual Charge off typically defined as a delinquency status beyond which contractually you can call an asset a loss. 180 day e.g. for credit cards

Any other type of charge off can happen from any bucket and many a times when the customer is not yet delinquent.

(RamanTiwari) #508

PNB invites bids:

(Sunday) #509

Last date for expression of interest is 24th August.

(AvinashMb) #510

It will be interesting to see who makes the bids for this. Apart from the PE guys it needs to be seen which other manager financial power houses are interested ?

HDFC, Kotak ?