Rating Rationale
July 26, 2019 | Mumbai
PNB Housing Finance Limited
Rating outlook revised to 'Negative', ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.4000 Crore
Long Term Rating CRISIL AA+/Negative (Outlook revised from 'Stable' and rating reaffirmed)
 
Lower Tier II Bonds Aggregating Rs.400 Crore  CRISIL AA+/Negative (Outlook revised from 'Stable' and rating reaffirmed) 
Lower Tier II Bonds Aggregating Rs.500 Crore  CRISIL AA+/Negative (Outlook revised from 'Stable' and rating reaffirmed) 
Non-Convertible Debentures Aggregating Rs.5700 Crore^  CRISIL AA+/Negative (Outlook revised from 'Stable' and rating reaffirmed) 
Rs.18500 Crore Fixed Deposit Programme  FAAA/Negative (Outlook revised from 'Stable' and rating reaffirmed)  
Rs.26000 Crore Commercial Paper Programme   CRISIL A1+ (Reaffirmed) 
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
^including Rs.1100 crore, previously classified as bonds
Detailed Rationale

CRISIL has revised its rating outlook on the long-term debt instruments, fixed deposit programme and long term bank facilities of PNB Housing Finance Limited (PNB Housing) to 'Negative' from 'Stable' while reaffirming the ratings at 'CRISIL AA+/FAAA'. The rating on the commercial paper programme has been reaffirmed at 'CRISIL A1+'.
 
The outlook revision reflects the increase in leverage and moderation in capital adequacy ratios and increased vulnerability of asset quality in the developer loan portfolio.
 
PNB Housing last raised equity capital of around Rs 3000 crores in fiscal 2017 during the initial public offering (IPO), post which the CRISIL-adjusted gearing (including securitisation) improved to 6.9 times as on March 31, 2017 from 12.4 times as on March 31, 2016 (on-book gearing of 6.4 times and 12.2 times respectively). However, since then, with the rapid growth in portfolio, the CRISIL-adjusted gearing of the company increased to 11.0 times (on-book gearing of 9.6 times) as on March 31, 2019, from 9.4 times (on-book gearing of 8.3 times) as on March 31, 2018. Further, the capital adequacy metrics too have moderated with Tier 1 and overall capital adequacy ratio at around 11.0% and 13.98% respectively as on March 31, 2019 compared to 12.75% and 16.67% as on March 31, 2018. While the company is cognizant of the same and is planning to raise equity in the current fiscal, the timing and quantum of the same and therefore the subsequent improvement in the gearing metrics is critical and a key monitorable.
 
In terms of business, the assets under management (AUM) for PNB Housing has grown at a CAGR of around 45% from fiscal 2016 to fiscal 2019 (36% year on year) reaching Rs 84,722 crores as on March 31, 2019. This has been driven by growth across both retail segments as well as the wholesale portfolio, albeit pace of growth in the latter has been higher due to low base. Consequently, share of individual housing loans to the AUM stands at 58% as on March 31, 2019, while share of the wholesale portfolio (including lease rental discounting (LRD)) is at 21%. 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.
 
Amidst the strong growth, the company's asset quality metrics have remained comfortable, better than industry average, with gross non-performing assets (GNPA) and 2 year lagged GNPA at 0.48% and 0.92%, respectively, as on March 31, 2019 (industry average: 1.4% and 2.1% respectively) compared to 0.33% and 0.68% as on March 31, 2018. Nevertheless, the concentration risk in the wholesale portfolio is high, with the top 20 group exposures constituting around 60% of the wholesale AUM as on March 31, 2019. Furthermore, some portion of the wholesale book is currently under moratorium with bullet or staggered repayments. 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. PNB Housing has exposure to some stressed accounts, part of whom are in advanced stages of exits. Consequently, with the slowdown in the real estate sector and incipient stress for developers, ability to get timely refinance/exits and recover from some of these exposures and maintain asset quality metrics is a key monitorable.
 
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 38,000 crores since September 2018 till June 30, 2019; 77% of which was in the form of bank loans and other long term borrowings such as non-convertible debenture, refinance from NHB and external commercial borrowings.
 
The ratings continue to reflect the established market position in the housing finance space and well diversified resource mix. 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.
 
CRISIL will continue to monitor the group's ability and timeliness and quantum of equity raise, as well as any increase in build-up of stress in the wholesale book. Based on these factors, CRISIL will take appropriate rating action.

Analytical Approach

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 - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths:
* Established market position in the housing finance space
The assets under management (AUM) for PNB Housing has grown at a CAGR of around 45% from fiscal 2016 to fiscal 2019 reaching Rs 84,722 crores as on March 31, 2019. This has been driven by growth across both retail segments as well as the wholesale portfolio, albeit pace of growth in the latter has been higher on account of the low base. Consequently, share of individual housing loans to the AUM has dropped to 58% as on March 31, 2019 compared to 64% as on March 31, 2014, while share of the wholesale portfolio (including lease rental discounting) increased to 21% from 11% during the same period. As on March 31, 2019, the AUM comprised of housing loans (58%), construction finance (13%), loan against property (LAP; 17%), lease rental discounting (LRD; 4%), non-residential property loan (NRPL; 4%), and corporate term loan (CTL; 4%). In terms of portfolio it is well diversified across India; with western, northern and southern India contributing 38%, 32% and 30%, respectively, as on March 31, 2019. 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.
 
 * Well-diversified resource profile
PNB Housing has maintained a healthy resource profile with better-than-peer cost of borrowings on account of its long-standing relationships with multilateral agencies (IFC and ADB), mutual funds, banks, insurance companies, provident funds, corporates and pension 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. Company has increased its focus on raising fixed deposits after December 2011; the share of fixed deposits in total borrowings stood at around 17% as on March 31, 2019. While the share of fixed deposits had earlier reduced from 27% as on March 31, 2016, this was due to a conscious decision by the company given the relatively higher cost of deposits. With the funding environment remaining challenging, PNB Housing now intends to focus on resource diversification and tapping the fixed deposits option. On a steady state basis, the share of granular fixed deposits to overall borrowings is expected to be around 23-25%.
 
Adding to the diversity in its resource profile, company has adequate proportion of capital market funding, with bonds and non-convertible debentures comprising 28% of total borrowings. Other funding sources include banks borrowings (18%), refinance from NHB (8%), commercial paper (10%), and external commercial borrowings (6%) and securitization (13%). Even amidst the current environment, with lenders exercising caution in increasing exposures, PNB Housing has managed to raise over Rs 38,000 crores since September 2018 till June 30, 2019; 77% of which was in the form of bank loans and other long term borrowings such as non-convertible debenture, refinance from NHB and external commercial borrowings. However, borrowing costs have risen for PNB Housing as seen for many other non-banks as well. Nevertheless, the increase has been moderate with the company's borrowing cost (based on yearly average) reaching around 8.2% for fiscal 2019 compared to 7.9% for the previous fiscal.
 
* Brand-sharing benefits from the parentage of PNB
PNB Housing continues to benefit from branding support from its parent, PNB (33% ownership currently). While the latter's stake has reduced from 51% following the IPO and the stake sale in November 2017, CRISIL believes PNB will remain amongst the largest shareholders of PNB Housing in the near term. PNB Housing is being managed by an independent management team, comprising professionals with strong domain knowledge and extensive experience in the mortgage business.
 
Weaknesses:
* Moderate capitalisation
PNB Housing last raised equity capital of around Rs 3000 crores in fiscal 2017 during the IPO, post which the CRISIL-adjusted gearing (including securitisation) improved to 6.9 times as on March 31, 2017 from 12.4 times as on March 31, 2016 (on-book gearing of 6.4 times and 12.2 times respectively). However, since then, with the rapid growth in portfolio, the CRISIL-adjusted gearing of the company increased to 11.0 times (on-book gearing of 9.6 times) as on March 31, 2019, from 9.4 times (on-book gearing of 8.6 times) as on March 31, 2018. Further, the capital adequacy metrics too have moderated with Tier 1 and overall capital adequacy ratio at around 11.0% and 13.98% respectively as on March 31, 2019 compared to 12.75% and 16.67% as on March 31, 2018.
 
While the networth coverage for net non-performing assets remains adequate at 27 times as on March 31, 2019, adjusted gearing metrics (including securitization) have inched up beyond 10 times, making it imperative for the company to raise capital. While the company is cognizant of the same and is planning to raise equity in the current fiscal, the timing and quantum of the same and therefore the subsequent improvement in the gearing metrics is critical and a key monitorable.
 
* Susceptibility to asset quality risks arising from the wholesale book
Amidst the strong growth, the company's reported asset quality metrics have remained comfortable, with GNPA and 2 year lagged GNPA at 0.48% and 0.92%, respectively, as on March 31, 2019 (industry average: 1.4% and 2.1% respectively) compared to 0.33% and 0.68% as on March 31, 2018. Nevertheless, the concentration risk in the wholesale portfolio is high, with the top 20 group exposures constituting around 60% of the wholesale AUM as on March 31, 2019.
 
Furthermore, some portion of the wholesale book is currently under moratorium with bullet or staggered repayments. 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. PNB Housing has exposure to some stressed accounts, part of whom are in advanced stages of exits. Consequently, with the slowdown in the real estate sector and incipient stress for developers, ability to get timely refinance/exits and recover from some of these exposures and maintain asset quality metrics is a key monitorable.
 
* Average, albeit improving, profitability
PNB Housing has average, albeit improving, earnings profile. The return on total managed assets (RoMA; profit after tax by total assets + securitisation) stood at 1.46% for fiscal 2019 same as last year. Net interest margins (NIMs: interest income- interest expense by yearly average of total assets) at 2.2% for fiscal 2019 have decreased from 2.9% in fiscal 2018 amidst increasing competition in the housing finance segment and an increase in the cost of borrowings owing to the environment. However, improvement in NIMs going forward would hinge upon the company's ability to lower its cost of funds as it reduces the share of wholesale portfolio leading to a higher share of the low yielding retail asset classes.
 
Nevertheless, over the past five fiscals, operating costs for PNB Housing have remained high owing to investments in infrastructure, systems and processes and people to support its strong growth plans, and increase in provisions (mainly for standard assets) and maintenance of excess liquidity to overcome with current challenging volatile market. With the new branches and investments in technology achieving scale, the same is expected to improve which would support the earnings profile.
 
On the other hand, credit costs, have been low till date, even including the additional voluntary provisions made by the company. However, given the susceptibility of asset quality to potential slippages in the developer portfolio, credit costs could spike. Therefore, 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

The liquidity profile of the company is comfortable. As on March 31, 2019, the adjusted asset liability management profile (excluding pending disbursements and lines of credit) of PNB Housing is adequate with positive cumulative mismatches in the upto 1 year bucket. This is largely due to significant on-balance sheet liquidity maintained by the company.
 
As on June 30, 2019, the company has debt repayments of Rs 16,018 crore till Sept 2019 of which commercial paper repayments stand at Rs 6,350 crores. Against the same, the company estimates steady inflow of average monthly collections of around Rs 1,600 crores. In addition, PNB Housing has estimated liquid funds of around Rs 4700 crore and estimated unutilised bank and ECB lines of around Rs 1800 crore as on June 30, 2019.

Outlook: Negative

CRISIL believes that PNB Housing will continue to grow backed by their resource raising ability and maintain an adequate liquidity profile. The rating may be downgraded, in case of a delay in the equity raising plans or lower quantum of the same which in CRISIL's view may continue to lead to elevated gearing metrics and/or increase in risks/stress in the company's wholesale portfolio, leading to stress on capitalisation and earnings profile and/or lack of reduction in the wholesale book composition. Conversely, the outlook may be revised to 'Stable' in case of sustained improvement in the capitalisation metrics and continued strong asset quality performance while maintaining the same in the wholesale portfolio.

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. 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
Particulars Unit Mar-19 Mar-18
Total assets Rs crore 83869 63014
Total income Rs crore 7683 5489
Profit after tax Rs crore 1192 841
Gross NPA % 0.48 0.33
Adjusted gearing (including securitisation) Times 11.0 9.1
Return on total managed assets* % 1.46 1.47
* PAT by Total Assets + Securitisation

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)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs. Cr) Rating Outstanding with Outlook
INE572E09072 Debenture 16-Jan-08 9.20% 16-Jan-20 30 CRISIL AA+/Negative
INE572E09080 Debenture 16-Jan-08 9.20% 16-Jan-21 30 CRISIL AA+/Negative
INE572E09098 Debenture 16-Jan-08 9.20% 16-Jan-22 30 CRISIL AA+/Negative
INE572E09106 Debenture 16-Jan-08 9.20% 16-Jan-23 30 CRISIL AA+/Negative
INE572E09130 Debenture 9-Nov-09 8.85% 9-Nov-19 125 CRISIL AA+/Negative
INE572E09148 Debenture 26-Jul-11 9.50% 26-Jul-21 200 CRISIL AA+/Negative
INE572E09155 Debenture 12-Sep-11 9.55% 12-Sep-21 200 CRISIL AA+/Negative
INE572E09163 Debenture 29-Jun-12 9.25% 29-Jun-22 300 CRISIL AA+/Negative
INE572E09171 Debenture 14-Sep-12 9.15% 14-Sep-22 200 CRISIL AA+/Negative
INE572E09189 Debenture 21-Dec-12 9.00% 21-Dec-22 200 CRISIL AA+/Negative
INE572E09197 Tier II Bonds 21-Dec-12 9.10% 21-Dec-22 200 CRISIL AA+/Negative
INE572E09205 Debenture 16-May-13 8.58% 16-May-23 600 CRISIL AA+/Negative
INE572E09239 Debenture 31-Jan-14 9.48% 31-Jan-24 300 CRISIL AA+/Negative
INE572E09262 Tier II Bonds 24-Nov-14 8.70% 24-Nov-24 200 CRISIL AA+/Negative
NA Debenture^ NA NA NA 1650.3 CRISIL AA+/Negative
INE572E09627 Debenture 7-Jan-2019 9.40% 5-Jan-2029 24.7 CRISIL AA+/Negative
INE572E09627 Debenture 24-Jan-2019 9.40% 5-Jan-2029 15 CRISIL AA+/Negative
INE572E07050 Debenture 28-Feb-2019 8.77% 28-May-2020 235 CRISIL AA+/Negative
NA Tier II Bonds^ NA NA NA 100 CRISIL AA+/Negative
NA Tier II Bonds^ NA NA NA 400 CRISIL AA+/Negative
NA Fixed Deposit Programme NA NA NA 18500 FAAA/Negative
N.A Commercial Paper Programme N.A N.A 7-365 days 26000 CRISIL A1+
N.A Term Loan N.A N.A 1-Jul-19 1198 CRISIL AA+/Negative
N.A Proposed Long-Term Bank Loan Facility N.A N.A NA 2802 CRISIL AA+/Negative
^Yet to be issued
 
Annexure - List of entities consolidated
Entity Consolidated Extent of Consolidation Rationale for Consolidation
PHFL Home Loans and Services Ltd. Full Subsidiary
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Bond  LT          19-02-18  CRISIL AA+/Stable  19-09-17  CRISIL AA+/Stable  13-07-16  CRISIL AA+/Negative  CRISIL AA+/Stable 
                12-07-17  CRISIL AA+/Stable  10-03-16  CRISIL AA+/Negative   
Commercial Paper  ST  26000.00  CRISIL A1+  05-04-19  CRISIL A1+  13-07-18  CRISIL A1+  19-09-17  CRISIL A1+  13-07-16  CRISIL A1+  CRISIL A1+ 
        04-03-19  CRISIL A1+  05-06-18  CRISIL A1+  12-07-17  CRISIL A1+  10-03-16  CRISIL A1+   
            19-02-18  CRISIL A1+           
Fixed Deposits  FD  18500.00  FAAA/Negative  05-04-19  FAAA/Stable  13-07-18  FAAA/Stable  19-09-17  FAAA/Stable  13-07-16  FAAA/Negative  FAAA/Stable 
        04-03-19  FAAA/Stable  05-06-18  FAAA/Stable  12-07-17  FAAA/Stable  10-03-16  FAAA/Negative   
            19-02-18  FAAA/Stable           
Lower Tier II Bonds  LT  500.00
26-07-19 		 CRISIL AA+/Negative  05-04-19  CRISIL AA+/Stable  13-07-18  CRISIL AA+/Stable  19-09-17  CRISIL AA+/Stable  13-07-16  CRISIL AA+/Negative  CRISIL AA+/Stable 
        04-03-19  CRISIL AA+/Stable  05-06-18  CRISIL AA+/Stable  12-07-17  CRISIL AA+/Stable  10-03-16  CRISIL AA+/Negative   
            19-02-18  CRISIL AA+/Stable           
Non Convertible Debentures  LT  5700.00
26-07-19 		 CRISIL AA+/Negative  05-04-19  CRISIL AA+/Stable  13-07-18  CRISIL AA+/Stable  19-09-17  CRISIL AA+/Stable  13-07-16  CRISIL AA+/Negative  CRISIL AA+/Stable 
        04-03-19  CRISIL AA+/Stable  05-06-18  CRISIL AA+/Stable  12-07-17  CRISIL AA+/Stable  10-03-16  CRISIL AA+/Negative   
            19-02-18  CRISIL AA+/Stable           
Fund-based Bank Facilities  LT/ST  4000.00  CRISIL AA+/Negative  05-04-19  CRISIL AA+/Stable  13-07-18  CRISIL AA+/Stable  19-09-17  CRISIL AA+/Stable  13-07-16  CRISIL AA+/Negative  CRISIL AA+/Stable 
        04-03-19  CRISIL AA+/Stable  05-06-18  CRISIL AA+/Stable  12-07-17  CRISIL AA+/Stable  10-03-16  CRISIL AA+/Negative   
            19-02-18  CRISIL AA+/Stable           
All amounts are in Rs.Cr.
 
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Long Term Loan 1198 CRISIL AA+/Negative Long Term Loan 1198 CRISIL AA+/Stable
Proposed Long Term Bank Loan Facility 2802 CRISIL AA+/Negative Proposed Long Term Bank Loan Facility 2802 CRISIL AA+/Stable
Total 4000 -- Total 4000 --
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Finance Companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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