PNB Housing Finance Limited Ratings reaffirmed ‘CRISIL AA/FAA+/Negative/CRISIL A1+’
Rating Action
^ including Rs.1100 crore, previously classified as bonds 1 crore = 10 million Refer to annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ratings on the debt instruments, bank facilities and fixed deposit programme of PNB Housing Finance Limited (PNB Housing) at 'CRISIL AA/FAA+/Negative/CRISIL A1+’.
CRISIL has also withdrawn its rating on the Non-convertible debenture of Rs 265 crore (See Annexure 'Details of Rating Withdrawn' for details) on confirmation from the debenture trustee as it is fully redeemed. The rating is withdrawn in line with CRISIL's policy.
The reaffirmation factors in clarity around the equity fund raise in recent months and continued strong resource raising ability at competitive rates. However, owing to pandemic situation, stressed assets metrics (gross non-performing assets + Covid restructuring) witnessed deterioration till March 2021 as compared to March 2020 with an increase in the overdue buckets in the retail segments as well as wholesale segment. With the Supreme Court order on freeze on bucket classification, PNB Housing was not able to adopt legal route to enforce property repossession, which post the lifting of the Supreme Court embargo has been reinitiated. CRISIL Ratings also notes that there hasn’t been any increase in GNPA between December 2020 (proforma of 4.47%) and March 2021 (reported of 4.44%). Nevertheless, impact of the second Covid wave and its resultant lockdown remains a key monitorable. Given the deterioration and possible further slippages on the asset quality front, CRISIL Ratings, has retained the outlook for PNB Housing at Negative. Controlling further slippages and ensuring improvement in asset quality metrics will remain a key monitorable going forward. 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-/Stable’), its largest shareholder.
To reduce leverage, the company had earlier planned to raise around Rs 2000 crore of equity by March 2020. However, the equity raise was subsequently lowered to Rs 1700 crore as key shareholder, PNB intended to hold a minimum of 26% stake in the company. Since then, more clarity around equity fund raise linked to ability of PNB to participate has emerged. In January 2021, PNB Housing’s board approved addition of QIP mode in addition to preferential issue and rights issue for the equity raise of Rs 1800 crores. Further in February 2021, PNB Housing has clarified that the promoter PNB would not be participating in the round. Consequently, PNB Housing will be able to raise equity without participation of PNB. However, CRISIL Ratings believes that PNB’s stake will not drop to below 26% from the current 32.6% post this round of equity raise. CRISIL Ratings expects the process to be completed in the near term and therefore, any further delay/change in the quantum of equity raise will be a key monitorable.
Despite the delay in the equity raise, the capitalisation metrics for PNB Housing have improved largely due to de-growth in the loan book CRISIL Ratings-adjusted gearing – including on-book borrowings and off-book assignment / securitisation - of 8.1 times (on-book gearing at 6.7 times) as on March 31, 2021 compared to 10.5 times (8.5 times) respectively as on March 31, 2020. This compares to a peak CRISIL Ratings-adjusted gearing of around 11 times as on March 31, 2019. Not only gearing but even the capital adequacy ratios have improved with overall capital adequacy ratio improving to 20.6% (without adjustment for deposits placed with companies in same group) as on March 31, 2021 as compared to around 18% as on March 31, 2020. Capital adequacy metrics have improved as incremental disbursement was focused on lower risk weight housing loans while the share of wholesale book has reduced. The constitution of wholesale portfolio to asset under management dropped to 16% as on March 31, 2021, from 19% as on March 31, 2020 and a peak of 26% as on March 31, 2019. CRISIL Ratings understands that the focus of the company is on further reducing the share of wholesale book to the portfolio which would support the capital adequacy metrics. Additionally, any further equity raise will also lower the gearing levels of the company. Nevertheless, any substantial change in the CRISIL Ratings-adjusted gearing going forward and when growth resumes remains a key monitorable.
Owing to the pandemic, the asset quality metrics for the company deteriorated in fiscal 2021. Reported gross non-performing assets (GNPA) ratio for the company increased to 4.44% as on March 31, 2021 compared to 2.75% as on March 31, 2020. The increase in the asset quality metrics was across both retail as well as wholesale segments. With the Supreme Court order on freeze on bucket classification, PNB Housing was not able to adopt legal route to enforce property repossession, which post the lifting of the Supreme Court embargo has been reinitiated. As on March 31, 2021, retail GNPA and wholesale GNPA stood at 2.5% and 12.7%, respectively. Under the one-time Covid restructuring scheme of RBI, the company also restructured retail accounts as well as wholesale accounts which constituted around 2.7% and 2.9% of the retail gross advances and corporate gross advances, respectively. Including the same, the stressed assets (i.e. GNPA + one time Covid restructuring scheme of RBI) were at 5.3% for retail book and 15.5% for wholesale book respectively. It is pertinent to note that the wholesale book has de-grown by ~19.4% in fiscal 2021 and hence the increase in stressed assets proportion is on a reducing book, although the proportion of wholesale portfolio has been range bound amidst degrowth in the overall AUM. Additionally, PNB Housing has voluntarily identified 5 accounts aggregating to Rs 875 crore (~7% of loan book) as having significant increase in credit risk (SICR). Nevertheless, CRISIL Ratings understands that most of the stressed accounts in the wholesale portfolio have been classified as NPA or is classified under SICR and therefore incremental stress in the wholesale portfolio is expected to remain controlled. Further, in the self-employed non-professionals retail segment portfolio of PNB Housing the impact is high as cash flows of these customers is adversely hit due to Covid. For the LAP segment in particular, while delinquencies in the low ticket sized segments remains controlled, PNB Housing has witnessed some pressure in the higher ticket sized segment due to a few large accounts. Nevertheless, impact of the second Covid wave and its resultant lockdown remains a key monitorable.
Despite all the challenges, CRISIL Ratings notes that PNB Housing has managed to raise funds of over Rs 21,000 crores since April 2020 at competitive borrowing costs. More pertinently, they have raised through diversified routes including bank loans, non-convertible debenture, refinance from NHB and external commercial borrowings. The average cost of borrowings in Q4 of fiscal 2021 was 7.60%. More importantly, the incremental cost of borrowing was at 6.80% for fiscal 2021 and at 6.26% for Q4 of fiscal 2021. |
Analytical Approach CRISIL Ratings 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. |
Key Rating Drivers & Detailed Description Strengths:
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. However, following the challenges since September 2018, the company had adopted a cautious stance which had resulted in a slowdown in growth with AUM de-growing by around 1.6% in fiscal 2020. Growth was further impacted with AUM de-growing by almost 11% to reach Rs 74,469 crores. The degrowth has been led by a drop in the wholesale portfolio while in fiscal 2021, retail portfolio has also dropped. Nevertheless, despite degrowth, PNB Housing continues to be amongst the top HFCs in the country. However, amidst the current environment, with caution around the wholesale portfolio, the company intends to reduce the share of the same going forward and is taking steps towards this direction with a stated objective to only grow in the retail segment.
PNB Housing has maintained a healthy resource profile with better-than-peer cost of borrowings supported by its long-standing relationships with banks, insurance companies, provident funds, corporates and pension funds, multilateral agencies (IFC and ADB) and mutual funds. The company has a diversified funding profile, with an adequate mix of retail and wholesale borrowings. A significant proportion of its funding is long-term to match the long tenure of its loan portfolio. The company has increased its focus on raising fixed deposits after December 2011; the share of fixed deposits in total on-book borrowings stood at around 28.5% as on March 31, 2021
Adding to the diversity in its resource profile, company has adequate proportion of capital market funding, with bonds and non-convertible debentures comprising 19.9% of total on-book borrowings as on March 31, 2021. Other funding sources include banks borrowings (26.7%), refinance from NHB (13.1%), commercial paper (1.9%), and external commercial borrowings (10.0%). Additionally, the company has also raised funds regularly through direct assignment route in the past. Even amidst the current environment, with lenders exercising caution in increasing exposures, CRISIL Ratings notes that PNB Housing has managed to raise funds of over Rs 21,000 crores since April 2020 at competitive borrowing costs. More pertinently, they have raised through diversified routes including bank loans, non-convertible debenture, refinance from NHB, and external commercial borrowings. The average cost of borrowings in Q4 of fiscal 2021 was 7.60%. More importantly, the incremental cost of borrowing was at 6.80% for fiscal 2021 and at 6.26% for Q4 of fiscal 2021.
PNB Housing continues to benefit from branding support from its parent, PNB (32.6% ownership currently). While the latter's stake has reduced from 51% following the IPO and the stake sale in November 2017, CRISIL Ratings believes PNB will remain amongst the largest shareholders of PNB Housing in the near term. PNB Housing has clarified that the promoter PNB would not be participating in the forthcoming equity raise. Consequently, PNB Housing will be able to raise equity without participation of PNB. However, CRISIL Ratings believes that PNB’s stake will not drop below 26% from the current 32.6% post this round of equity raise. CRISIL Ratings 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. In terms of resource profile, the company has consistently raised fixed deposits and it now constituted around 28.5% of overall on-book borrowings. Nevertheless, PNB Housing is being managed by an independent management team, comprising professionals with strong domain knowledge and extensive experience in the mortgage business.
Weaknesses:
To reduce leverage, the company had earlier planned to raise around Rs 2000 crore of equity by March 2020. However, the equity raise was subsequently lowered to Rs 1700 crore as key shareholder, PNB intended to hold a minimum of 26% stake in the company. Since then, more clarity around equity fund raise linked to ability of PNB to participate has emerged. In January 2021, PNB Housings board approved addition of QIP mode in addition to preferential issue and rights issue for the equity raise of Rs 1800 crores. Further in February 2021, PNB Housing has clarified that the promoter PNB would not be participating in the round. Consequently, PNB Housing will be able to raise equity without participation of PNB. However, CRISIL Ratings believes that PNB’s stake will not drop to below 26% from the current 32.6% post this round of equity raise. CRISIL Ratings expects the process to be completed in the near term and therefore, any further delay/change in the quantum of equity raise will be a key monitorable.
Despite the delay in the equity raise, the capitalisation metrics for PNB Housing have improved largely due to de-growth in the loan book with CRISIL Ratings-adjusted gearing at 8.1 times (on-book gearing at 6.7 times) as on March 31, 2021 compared to 10.5 times (8.5 times) respectively as on March 31, 2020. This compares to a peak CRISIL Ratings-adjusted gearing of around 11 times as on March 31, 2019. Not only gearing but even the capital adequacy ratios have improved with overall capital adequacy ratio improving to 20.6% (without adjustment for deposits placed with companies in same group) as on March 31, 2021 as compared to around 18% as on March 31, 2020. Capital adequacy metrics have improved as incremental disbursement was focused on lower risk weight housing loans while the share of wholesale book has reduced. The constitution of wholesale portfolio to asset under management dropped to 16% as on March 31, 2021, from 19% as on March 31, 2020 and a peak of 26% as on March 31, 2019. CRISIL Ratings understands that the focus of the company is on further reducing the share of wholesale book to the portfolio which would support the capital adequacy metrics. Additionally, any further equity raise will also lower the gearing levels of the company. Nevertheless, any substantial change in the CRISIL Ratings-adjusted gearing going forward and when growth resumes remains a key monitorable.
Owing to pandemic, the asset quality metrics for the company deteriorated in fiscal 2021. Reported gross non-performing assets (GNPA) ratio for the company increased to 4.44% as on March 31, 2021 compared to 2.75% as on March 31, 2020. The increase in the asset quality metrics was across both retail as well as wholesale segments. With the Supreme Court order on freeze on bucket classification, PNB Housing was not able to adopt legal route to enforce property repossession, which post the lifting of the Supreme Court embargo has been reinitiated. As on March 31, 2021, retail GNPA and wholesale GNPA stood at 2.5% and 12.7%, respectively. Under the one-time Covid restructuring scheme of RBI, the company also restructured retail accounts as well as wholesale accounts which constituted around 2.7% and 2.9% of the retail gross advances and corporate gross advances, respectively. Including the same, the stressed assets (i.e. GNPA + one time Covid restructuring scheme of RBI) were at 5.3% for retail book and 15.5% for wholesale book respectively. It is pertinent to note that the wholesale book has de-grown by ~19.4% in fiscal 2021 and hence the increase in stressed assets proportion is on a reducing book, although the proportion of wholesale portfolio has been range bound amidst degrowth in the overall AUM. Additionally, PNB Housing has voluntarily identified 5 accounts aggregating to Rs 875 crore (~7% of loan book) as having significant increase in credit risk (SICR). Nevertheless, CRISIL Ratings understands that most of the stressed accounts in the wholesale portfolio have been classified as NPA or is classified under SICR and therefore incremental stress in the wholesale portfolio is expected to remain controlled. Further, in the self-employed non-professionals retail segment portfolio of PNB Housing the impact is high as cash flows of these customers is adversely hit due to Covid. For the LAP segment in particular, while delinquencies in the low ticket sized segments remains controlled, PNB Housing has witnessed some pressure in the higher ticket sized segment due to a few large accounts. Nevertheless, impact of the second Covid wave and its resultant lockdown remains a key monitorable. While in a business as usual scenario, CRISIL Ratings expects asset quality to improve going forward, any material slippages on the asset quality front remain a key rating sensitivity factor.
PNB Housing has average earnings profile. Despite elevated provisioning costs, the return on total managed assets (RoMA; PAT by Total Assets + Securitisation) stood at 1.04% for fiscal 2021 (0.68% for fiscal 2020). NIMs have compressed over the years mainly on account intensifying competition from banks and higher cost of borrowing. However, lower borrowing costs with increasing focus on affordable housing finance are expected to bode well for NIMs. Nevertheless, over the past five fiscals, the earnings profile for PNB Housing has been constrained on account of (i) increase in provisions (mainly for standard assets), (ii) maintenance of excess liquidity to manage the challenging funding environment and (iii) elevated operating costs amidst continuous digitisation investments. With the new branches and investments in technology achieving scale, PNB Housing is expected to improve its operating costs which would support the earnings profile.
But controlling credit costs would be the key in terms of maintaining earnings profile. The credit costs for PNB Housing inched up to 1.5% in fiscal 2020 as the company provided aggressively towards Covid which stood at 1% for fiscal 2021. This comes on the back of an increasing provision coverage ratio improving to 45% from 36% in the last 1 year. Nevertheless the consistency in credit costs remains a key monitorable. Hence, the ability of the company to manage asset quality going ahead specifically in the wholesale segment, will be a key determinant of profitability going ahead. |
Liquidity: Strong PNB Housing's asset-liability maturity profile is strong. The company has negative cumulative gaps in the upto 1 year bucket (excluding lines of credit) in the provisional structural ALM of December 31, 2020. However, this turns positive post including the lines of credit. As on March 31, 2021, the company had debt repayments (including short-term and OD lines which are subject to rollover) of Rs 6,213 crore till June 2021. Against this it has cash and equivalents of Rs 6,620 crore and sanctioned and unutilised bank lines of Rs 2,595 crore. |
Outlook: Negative CRISIL Ratings believes that the resource raising ability for PNB Housing would remain strong and the company would continue to maintain high liquidity levels and raise equity in the near term. However, inability to improve asset quality metrics or delay in the capital raise/quantum of capital raise is a key monitorable. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company 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-/Stable/CRISIL A1+'). 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. |
Key Financial Indicators
# On-book borrowings + off-book assignment / securitisation by networth * PAT by Total Assets % PAT by Managed Assets (Total Balance Sheet assets + Off-book assigned / securitised assets) |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
^Yet to be issued
Annexure – Details of Ratings withdrawn
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Annexure – List of entities consolidated
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Criteria Details
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