India’s biggest ever quarterly bank profit for Punjab National Bank in Q2 2018 on sale of PNB Housing stake.
https://www.bloomberg.com/news/articles/2018-07-13/fraud-hit-pnb-is-said-to-aim-for-india-s-biggest-bank-profit
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.
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 http://www.ecoti.in/YFUazZ 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 http://www.ecoti.in/o210EZ via @economictimes
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
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.
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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
@yogesh
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.
Bobby
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.
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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
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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.
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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.
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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
It should mean 50 to 55 percent of the GNPA would be wiped out.
Loss Given Default = (1 - Recovery %) for accounts that have defaulted
Clarifications:
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.
PNB invites bids:
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Last date for expression of interest is 24th August.
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 ?
I would like to see Piramal Enterprises also
Piramal vs Kotak
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How about Bajaj Finance 
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No incentive for Bajaj finance as they have their own housing finance and enjoy superior customer loyalty. Their business model is repeat customers giving more business. I believe it makes more sense for Kotak / Yes / Piramal to acquire this “government” tag.
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