Rating Rationale
September 19, 2017 | Mumbai
PNB Housing Finance Limited
Rated amount enhanced
Rating Action
Total Bank Loan Facilities Rated Rs.4000 Crore
Long Term Rating CRISIL AA+/Stable (Reaffirmed)
Rs.14500 Crore Fixed Deposit Programme
(Enhanced from Rs.8500 crore)
FAAA/Stable (Reaffirmed)
Rs.16000 Crore Commercial Paper Programme
(Enhanced from Rs.1000 crore)
CRISIL A1+ (Reaffirmed)
Non-Convertible Debentures Aggregating Rs.4600 crore CRISIL AA+/Stable (Reaffirmed)
Lower Tier II Bonds Aggregating Rs.500 crore CRISIL AA+/Stable (Reaffirmed)
Bonds Aggregating Rs.1100 crore CRISIL AA+/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings of 'CRISIL AA+/FAAA/Stable/CRISIL A1+' on the debt instruments of PNB Housing Finance Limited (PNB Housing).
In July 2017, CRISIL had revised its rating outlook on the long-term debt instruments, fixed deposit and bank facilities of PNB Housing while reaffirming the ratings on its short-term debt programme.
The outlook revision reflects the significant scale-up in the loan book of PNB Housing, while maintaining comfortable asset quality metrics. The company's assets under management grew at a compound annual growth rate of 58% over the last three years and reached Rs 41,492 crores as on March 31, 2017. Growth continued with AUM increasing by 50% (y-o-y) to reach Rs 46,755 crores as on June 30, 2017. Gross non-performing assets (NPAs) were at 0.4% as on June 30, 2017 against 0.2% as on March 31, 2017. On a two-year lagged basis also, gross NPAs were at 0.9% as on June 30, 2017, which compares favourably with industry average. The capitalization of the company also provides a healthy cover for any asset-side risks. The net worth and overall capital adequacy ratio (CAR) were Rs 5795 crore and 20.3% as on June 30, 2017 against Rs 5577 crore and 21.6%, respectively, as on March 31, 2017. As on the same date, the company's networth coverage for unprovided weak assets was high at around 15 times.
The ratings continue to reflect the expectation of support from the company's largest shareholder, Punjab National Bank (PNB, rated: CRISIL AAA/CRISIL AA1/Negative). These rating strengths are partially offset by the average, albeit improving earnings profile.

Key Rating Drivers & Detailed Description
* Expectation of support from PNB
PNB Housing continues to benefit from the expectation of support from its largest shareholder, PNB (39% ownership currently) given the increasing strategic importance of PNB Housing to PNB and the latter's high moral obligation towards PNB Housing.
While PNB's stake has reduced from 51% following an initial public offering (IPO), CRISIL believes the bank will remain the key strategic shareholder of PNB Housing and will continue to play a key role in the latter's strategic decision-making process. In the past, the bank has provided regular capital support, including  infusing its share of around Rs 510 crore in PNB Housing's rights issue of Rs 1000 crore in fiscal 2016. The company also benefits from common branding with its parent, which is a leading public sector bank in India with a strong retail and corporate presence and a solid brand image. The company's strategic importance to the parent has increased over the past two years, underpinned by improvement in its competitive position and expectation of gradual increase in profitability over the medium term. In line with its private-partnership model, the company is being managed by an independent team, comprising professionals with strong domain knowledge and extensive experience in the mortgage business. The new management team has led the improvement in performance.
The extent of ownership by PNB, impacting the strategic importance of, or moral obligation towards, PNB Housing, or a significant deterioration in CRISIL's ratings on PNB will be a key rating sensitivity factor.
* Comfortable capitalisation with healthy cushion against asset-side risks
PNB Housing has comfortable capitalization. The net worth and overall CAR were Rs 5795 crore and 20.3%, respectively, as on June 30, 2017 (Rs 2242 crore and 13.1%, respectively, as on June 30, 2016). As on this date, the networth coverage for un-provided weak assets2 was high at 15 times. Capitalisation has been supported by the IPO in November 2016 through which around Rs 3000 crore was raised.  Post the IPO, the adjusted gearing improved to 6.9 times as on March 31, 2017 (12.4 times as on March 31, 2016). Adjusted gearing metrics continue to remain comfortable at 7.3 times as on June 30, 2017. PNB Housing's board is committed to maintaining the gearing below 10 times on a steady-state basis over the medium term, supported by regular capital infusion. CRISIL believes PNB Housing's ability to maintain steady-state gearing below 10 times will remain key monitorable.
* 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 insurance companies, provident funds, and pension funds. The company has a diversified funding profile, with an adequate mix of retail and wholesale borrowings. It has increased its focus on raising fixed deposits after December 2011; the share of fixed deposits in total borrowings stood at around 25% as on June 30, 2017.
* Comfortable asset quality metrics; impact of seasoning to be monitored
Asset quality metrics have improved steadily over the past three fiscals. Asset quality in the recently originated book (loans originated after the business process re-engineering exercise in July 2011) is expected to remain close to the industry average. Gross NPAs deteriorated marginally to 0.4% as on June 30, 2017 against 0.3% as on June 30, 2016 (similar to the previous year). On a two-year lagged basis also, gross NPAs were at 0.9%, which compares favourably with the industry average.
The company has completely revamped its business model and has put in place strong credit underwriting, monitoring, and collection mechanisms to support its asset quality. Despite the recent improvement in asset quality, the impact of seasoning in the loan book will be visible only over the medium term given the rapid loan growth. Furthermore, the asset quality performance in the relatively riskier non-home loan portfolio (which accounts for around 40% of the loan book (including around 10% of construction finance)), especially in the construction finance segment, remains to be seen. Hence, maintenance of asset quality at around the industry average over the medium-term will remain a key monitorable.
* Average profitability metrics
PNB Housing's return on assets (RoA, annualised) improved to 1.6% in the first quarter of fiscal 2018 against 1.2% in the corresponding quarter the previous year. RoA improved to 1 .4% for fiscal 2017 compared to 1.3% in fiscal 2016; however, it remains lower than industry average mainly due to higher-than-industry average operating expenses. Operating costs increased mainly because of the large investment in the enterprise system solution, people, infrastructure, and refurbishment of branches. These investments will yield benefits as the company scales up operations. Increase in operating costs has also been because of an increase in the cost of loan acquisition, driven by higher-than-industry-average growth. Operating expenses will remain high over the near term primarily because of the branch expansion plans to support the company's future growth plans and increased spend on the advertising campaign. PNB Housing's profitability is expected to improve gradually, over the medium-term, supported primarily by increased operating efficiencies.
PNB Housing's earnings profile remains susceptible to increase in credit costs because of the impact of seasoning of loan book and increase in delinquencies in the non-housing loan portfolio. Furthermore, the company's ability to maintain interest spreads amid increased competition remains to be seen.
Outlook: Stable

CRISIL believes that PNB Housing will continue to maintain its capitalization metrics with a healthy cover for any asset-side risks along with gradual improvement in the market share. Further, PNB Housing is expected to continue to draw benefits from PNB support over the medium term.
Upside scenario
* Sustained improvement in the market position and earnings while asset quality is maintained

Downside scenario
*Deterioration in asset quality and earnings
*Significant weakening of the credit risk profile of PNB, or less-than-expected support from the bank

About the Company

PNB Housing, incorporated in 1988, was promoted by PNB as a deposit-taking housing finance company, registered with National Housing Bank,. In December 2009, PNB sold 49% stake 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, Quality Investments Holdings, pursuant to in specie distribution of its assets as per a winding-up scheme. PNB Housing has successfully completed an IPO in November 2016 and raised Rs 3000 crore, which resulted in dilution of PNB's stake to around 39% (from 51% earlier); however, it remains the largest shareholder in PNB Housing.
Profit after tax (PAT) was Rs 524 crore on total income of Rs 3908 crore in fiscal 2017, against a PAT of Rs 326 crore on total income of Rs 2696 crore in fiscal 2016.
PAT was Rs 185 crore on total income of Rs 1192 crore in the first quarter of fiscal 2018 against PAT of 96 crore on a total income of Rs 863 crore in the corresponding period the previous year.

1for Tier I Bonds (Under Basel III)
Two-year lagged NPAs

Key Financial Indicators
Particulars Unit 2017 2016
Total Assets Rs. Cr. 42960 29671
Total income Rs. Cr. 3908 2696
Profit after tax Rs. Cr. 524 326
Gross NPA % 0.2 0.2
Adjusted gearing  Times 6.9 12.4
Return on assets % 1.4 1.3

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
INE572E09064 Debenture 16-Jan-08 9.20% 16-Jan-19 30 CRISIL AA+/Stable
INE572E09072 Debenture 16-Jan-08 9.20% 16-Jan-20 30 CRISIL AA+/Stable
INE572E09080 Debenture 16-Jan-08 9.20% 16-Jan-21 30 CRISIL AA+/Stable
INE572E09098 Debenture 16-Jan-08 9.20% 16-Jan-22 30 CRISIL AA+/Stable
INE572E09106 Debenture 16-Jan-08 9.20% 16-Jan-23 30 CRISIL AA+/Stable
INE572E09130 Debenture 9-Nov-09 8.85% 9-Nov-19 125 CRISIL AA+/Stable
INE572E09148 Debenture 26-Jul-11 9.50% 26-Jul-21 200 CRISIL AA+/Stable
INE572E09155 Debenture 12-Sep-11 9.55% 12-Sep-21 200 CRISIL AA+/Stable
INE572E09163 Debenture 29-Jun-12 9.25% 29-Jun-22 300 CRISIL AA+/Stable
INE572E09171 Debenture 14-Sep-12 9.15% 14-Sep-22 200 CRISIL AA+/Stable
INE572E09189 Debenture 21-Dec-12 9.00% 21-Dec-22 200 CRISIL AA+/Stable
INE572E09197 Lower Tier II Bonds 21-Dec-12 9.10% 21-Dec-22 200 CRISIL AA+/Stable
INE572E09205 Debenture 16-May-13 8.58% 16-May-23 600 CRISIL AA+/Stable
INE572E09213 Debenture** 20-Jan-14 9.59% 20-Jul-17 300 CRISIL AA+/Stable
INE572E09239 Debenture 31-Jan-14 9.48% 31-Jan-24 300 CRISIL AA+/Stable
INE572E09221 Debenture 31-Jan-14 9.53% 31-Jan-19 300 CRISIL AA+/Stable
INE572E09247 Debenture 21-Oct-14 9.05% 21-Oct-17 600 CRISIL AA+/Stable
INE572E09254 Debenture 24-Nov-14 8.60% 24-Jan-18 300 CRISIL AA+/Stable
INE572E09262 Lower Tier II Bonds 24-Nov-14 8.70% 24-Nov-24 200 CRISIL AA+/Stable
NA Debenture^ NA NA NA 825 CRISIL AA+/Stable
NA Lower Tier II Bonds^ NA NA NA 100 CRISIL AA+/Stable
NA Bonds^ NA NA NA 1100 CRISIL AA+/Stable
NA Fixed Deposit Programme NA NA NA 14500 FAAA/Stable
N.A Commercial Paper Programme N.A N.A 7-365 16000 CRISIL A1+
N.A Term Loan-1 N.A N.A 1-Jul-19 1198 CRISIL AA+/Stable
N.A Term Loan-2** N.A N.A 27-Jan-15 200 CRISIL AA+/Stable
N.A Term Loan-3** N.A N.A 1-Aug-17 350 CRISIL AA+/Stable
N.A Term Loan-4** N.A N.A 11-Apr-17 146 CRISIL AA+/Stable
N.A Term Loan-5** N.A N.A 14-Jan-15 480 CRISIL AA+/Stable
N.A Term Loan-6** N.A N.A 02-Jun-17 160 CRISIL AA+/Stable
N.A Term Loan-7** N.A N.A 12-Dec-14 400 CRISIL AA+/Stable
N.A Proposed Long-Term Bank Loan Facility N.A N.A NA 1066 CRISIL AA+/Stable
^Yet to be issued
** Redeemed/Repaid; we are awaiting third party verification before withdrawing ratings
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Bond  LT  1100  CRISIL AA+/Stable  12-07-17  CRISIL AA+/Stable  10-03-16  CRISIL AA+/Negative    No Rating Change    No Rating Change  CRISIL AA+/Stable 
Commercial Paper  ST  16000  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A1+ 
Fixed Deposits  FD  14500  FAAA/Stable  12-07-17  FAAA/Stable  10-03-16  FAAA/Negative    No Rating Change    No Rating Change  FAAA/Stable 
Lower Tier II Bonds  LT  500  CRISIL AA+/Stable  12-07-17  CRISIL AA+/Stable  10-03-16  CRISIL AA+/Negative    No Rating Change    No Rating Change  CRISIL AA+/Stable 
Non Convertible Debentures  LT  4600  CRISIL AA+/Stable  12-07-17  CRISIL AA+/Stable  10-03-16  CRISIL AA+/Negative    No Rating Change    No Rating Change  CRISIL AA+/Stable 
Fund-based Bank Facilities  LT/ST  4000  CRISIL AA+/Stable  12-07-17  CRISIL AA+/Stable  10-03-16  CRISIL AA+/Negative    No Rating Change    No Rating Change  CRISIL AA+/Stable 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Long Term Loan 2934 CRISIL AA+/Stable Long Term Loan 2934 CRISIL AA+/Stable
Proposed Long Term Bank Loan Facility 1066 CRISIL AA+/Stable Proposed Long Term Bank Loan Facility 1066 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
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support
Criteria for rating Short-Term Debt (including Commercial Paper)

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