CRISIL has downgraded its rating on the long-term debt instruments, bank facilities and fixed deposit programme of PNB Housing Finance Limited (PNB Housing) to 'CRISIL AA/FAA+' from 'CRISIL AA+/FAAA'. CRISIL has also revised the outlook on the long-term ratings to 'Stable' from 'Negative'. The rating on the commercial paper (CP) issue and the short-term non-convertible debentures has been reaffirmed at 'CRISIL A1+'. Consequent to redemption, CRISIL has also withdrawn its rating on non-convertible debentures of Rs 155 crore (See Annexure 'Details of rating withdrawn' for details) in line with its withdrawal policy. CRISIL has received independent confirmation that these instruments are fully redeemed.
 
Earlier in July 2019, CRISIL had revised the rating outlook to 'Negative' due to concerns over leverage metrics, moderation in capital adequacy ratios and increased vulnerability of asset quality in the wholesale loan portfolio.
 
The current downgrade in the long term rating is driven by lower than expected equity raise which will result in the correction in gearing metrics being lower than earlier envisaged. The rating action also factors in weakening of asset quality metrics due to slippages from some large developer accounts in the wholesale loan portfolio. However, CRISIL also notes that PNB Housing's fund raising ability has remained intact over the last 6-9 months and it is continuing to maintain high on-balance sheet liquidity. Further, CRISIL notes that the management now intends to recalibrate their growth strategy keeping in mind the capital availability and also increase the share of retail book due to challenges in the wholesale book. This will ensure that, post equity raise, the leverage metrics and capital adequacy levels remain under control. Consequently, the outlook has been revised to 'Stable'.
 
PNB Housing last raised equity capital of around Rs 3000 crores in fiscal 2017 during the initial public offering (IPO), post which the on-book gearing improved to 6.4 times as on March 31, 2017 from 12.4 times as on March 31, 2016 (CRISIL-adjusted gearing including off book improved to 6.9 times as on March 31, 2017 from 12.4 times as on March 31, 2016. Off book assets of PNB Housing entirely comprises of securitised portfolio sold via direct assignment route without any partial credit guarantee). Since then, the company's on-book gearing has moved to 8.4 times as on December 31, 2019 (CRISIL-adjusted gearing including off book of 10.4 times). This has improved from March 31, 2019 levels as company sold off retail and wholesale assets aggregating close to 11,000 crore during this period. The capital adequacy of the company also improved from 13.98% as of March 31, 2019 to 17.06% as on December 31, 2019 (Tier 1 ratio increased from 11% to 14.09% during this period).
 
To further reduce leverage, the company had earlier planned to raise around Rs 2000 crore of equity by March 2020. However, the equity raise is now expected to be lower at Rs 1500 to 1600 crore. CRISIL has noted that Punjab National Bank (PNB), the single largest shareholder with 32.65% stake, intends to hold a minimum of 26% stake in PNB Housing; but, they are not likely to immediately take part in the current equity raise. CRISIL believes that PNB's continued association as promoter along with sharing of brand name benefits PNB Housing in a confidence-sensitive environment for NBFCs and HFCs. However, their inability to participate in the equity raise will constrain quantum of funds raised and in turn growth rates as the company intends to focus on keeping leverage under control. Consequently, the on-book gearing is expected to be around 6.5 times while the CRISIL-adjusted gearing including off book will range between 7.5 to 8 times.
 
In terms of asset quality, the company's gross non-performing asset (GNPA) ratio has deteriorated to 1.75% as on December 31, 2019 compared to 0.48% as on March 31, 2019. The retail on-balance sheet loan book has witnessed a marginal uptick in delinquencies in early buckets but remains in control. The increase in overall GNPA was mainly on account of slippages from some large developer accounts. The company's outstanding off-book assets of Rs 17,103 crore entirely comprises of retail portfolio (housing loans and loan against property) sold to various banks through direct assignment route without any credit enhancement or partial credit guarantee. The GNPA remains low here too at 0.20% with average pool seasoning of 35 months.
 
As on December 31, 2019, GNPA for the wholesale loan portfolio stood at 4.17% compared to 0.17% as on March 31, 2019. While there are some accounts, which are currently stressed, the management is taking steps in order to ensure no further slippages take place from these accounts. A significant proportion of wholesale book is currently under moratorium with staggered repayments. As on December 31, 2019, around 65% of the wholesale loan portfolio is still in moratorium period. However, by March 31, 2021 additional around 40% of the book will come out of moratorium. While the company follows sound credit appraisal and risk management practices, has adequate collateral cover for its wholesale loans, and has also built strong recovery capabilities, asset quality in the past for the wholesale portfolio was also supported by an active refinance market, particularly for the real estate loans. However, with the slowdown in the real estate sector and incipient stress for developers, ability to get timely refinance/exits and recovery from some of these exposures and maintain asset quality metrics is a key monitorable.
 
In terms of business, the assets under management (AUM) for PNB Housing had grown at a CAGR of around 45% from fiscal 2016 to fiscal 2019 (36% year on year) reaching Rs 84,722 crore as on March 31, 2019. For nine months ended fiscal 2020, AUM growth has slowed down to an annualised growth of 2.5% reaching Rs 86,297 crore. In line with the cautious stance adopted by the company, the wholesale segment has degrown in the first nine months of fiscal 2020, consequently, leading to an increase in the share of retail portfolio. Share of individual housing loans to the AUM stands at 59% as on December 31, 2019, while share of the wholesale portfolio is at 18%. The share of wholesale book is expected to reduce gradually over the medium term as company's stated objective is to only grow in the retail segment.
 
From a funding perspective, even amidst the current challenging environment with lenders exercising caution in increasing exposures, CRISIL notes that PNB Housing has managed to raise over Rs 33,000 crores since April 2019 till December 31, 2019. More pertinently, they have raised through diversified routes including bank loans, non-convertible debenture, refinance from NHB, external commercial borrowings and retail fixed deposits. PNB Housing has also maintained strong liquidity levels with cash equivalents (not considering SLR investments of around Rs 1,918 crore) of around Rs 7,625 crore as on January 31, 2020 and additional Rs 6,351 crore in the form of sanctioned and unutilised bank lines, and NHB refinance.
 
The ratings also factors in the brand-sharing benefits that PNB Housing derives from its parentage of Punjab National Bank (PNB, rated: 'CRISIL AA+/CRISIL AA-/Watch Developing'), its largest shareholder.

CRISIL has fully consolidated the business and financial risk profile of PNB Housing and its subsidiary given the managerial, operational and financial linkages. The ratings also factor in the brand-sharing benefits from the parentage of PNB.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

PNB Housing's asset-liability maturity profile is strong. The company has positive cumulative gaps in the upto 1 year bucket (excluding lines of credit) largely helped by high on-balance sheet liquidity. As on December 31, 2019, the company had debt repayments of Rs 19,500 crore over the six months till June 2020. Further, the company had estimated collections (including prepayments) of Rs 20,000 crore over the same period. Additionally, as on January 31, 2020, PNB Housing has cash equivalents (not considering SLR investments of around Rs 1,918 crore) of Rs 7,625 crore and sanctioned and unutilised bank lines and NHB refinance of Rs 6,351 crore.

CRISIL believes that PNB Housing will maintain its gearing metrics post equity raise. Their resource raising ability is also expected to remain strong while they will continue to maintain high liquidity levels.

PNB Housing was set up in 1988, as a deposit-taking housing finance company (HFC) registered with National Housing Bank (NHB), promoted by Punjab National Bank (PNB; rated 'CRISIL AA+/CRISIL AA-/Watch Developing'). In December 2009, PNB sold 49% stake in PNB Housing and entered into a strategic partnership with Destimoney Enterprises Pvt Ltd (owned by NSR Partners). During fiscal 2017, Destimoney Enterprises Ltd transferred equity shares in PNB Housing to its holding Company i.e. Quality Investments Holdings (part of the Carlyle Group) pursuant to in specie distribution of its assets as per winding up scheme.

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