After the no-go on the deal with Carlyle Group, here's what PNB Housing Finance needs to do

PNB Housing Finance, a subsidiary of state-owned Punjab National Bank, is back to the drawing board after the Rs 4,000 crore equity deal with the private equity firm Carlyle Group got mired in legal issues. The board of the PNB's housing arm has already cancelled the equity infusion proposal citing legal delays. The company, with a market capitalisation of Rs 20,000 crore plus, is in urgent need of long-term equity as slower loan growth and higher NPAs are increasing the provisioning pressure and reducing profits. Undoubtedly, the medium to the long-term solution is to raise fresh equity, make a rights issue or invite strategic investments, but the immediate short-term options would be to rebalance the home loan portfolio to save as much capital till the new money comes in. So, what are these options?

Focus on lower loan to value in the home loan segment

The delay in the fundraising exercise has implications for the overall business as the capital is limited and the provisioning and NPAs are on the rise. The gross NPAs have already jumped to 6.0 per cent in the first quarter of 2021-22 as compared to 4.44 per cent in 2020-21 and 2.75 per cent in 2019-20.  At a time when the growth is important, the company has no option but to focus on retail loans with loans to value (LTV) of less than 80 per cent because such loans attract lower risk weights of 35 per cent. Risk weight is the amount that the company has to set aside from the capital for every loan underwritten.  The RBI has set different risk weights for different categories of loans. Higher the risk, the higher will be the risk weights. Take for example, the unsecured loans have the highest risk weights of over 100 per cent.

The company also has the option to provide higher loans to value of 80 per cent to 90 per cent, but the risk weight increases to 50 per cent. This is much higher than the 35 per cent for lower LTV loans. The company can easily drive capital efficiency or save capital for the time being by simply focussing on a lower LTV segment until it raises additional capital.

Reducing high yielding wholesale real estate business

The high-yielding corporate portfolio is the one that has brought maximum NPAs for the company. The corporate gross NPAs are in excess of 15 per cent in 2020-21. While the company's wholesale portfolio is low, it has to completely exit from such risky loans where the value is higher and the loans also need higher risk weights (that is, consume more capital).

Securitisation and sale of home loan portfolios

In the past, the company with a balance sheet of Rs 71,392 crore has sold loans to conserve capital. The options for a complete sell-off or securitisation still exist, which will not only conserve capital but also provide room for creating a better and stable loan mix within retail business. For example, it has the option to do salaried or self-employed home loans within retail. Currently, the self-employed segment is more vulnerable post the Covid-19 outbreak. The company also has an existing good quality self-employed home loan portfolio where many banks and NBFCs are interested.

Higher internal accruals

The company has stayed away from paying dividend in 2020-21 despite a profit of Rs 930 crore. This was a welcome move as the operating environment was challenging with the second wave of the pandemic hitting the country. Given the one-time loan restructuring and the slow economic growth, there is likely to be more pain going forward. The company should create a buffer by retaining the profits. In the first quarter of 2021-22, the company has made a profit of Rs 243 crore. The digitisation drive within the company will also result in savings and improving the margins in the near future.

Also Read: PNB Housing terminates Rs 4,000 cr fund-raising deal with Carlyle-led group

Also Read: PNB Housing Finance stock hits lower circuit after firm cancels Rs 4K-crore Carlyle deal