Proposed equity issuance could ease gearing issues, but we still see challenges to loan growth.
The PAT for the third quarter fell 22%Y-o-Y to Rs 240 crore (26% miss) as NII growth and provisions disappointed. GNPA rose sharply, led by rises in retail and corporate GNPA. Proposed equity issuance could ease gearing issues, but we still see challenges to loan growth. We cut our estimates. Despite reasonable valuations (0.9x BV), we stay at ‘Hold’.
The loan book contracted 2.2% Y-o-Y (AUM 8% YoY) vs 11% in 2Q (7% miss). Disbursal fell 66%Y-o-Y (retail -58% YoY, developer -85% Y-o-Y) on, high gearing levels and liquidity constraints; curtailed disbursal to the developer segment; weak housing loan demand; and cautious stance on home loans for under-construction properties, where mgmt sees a risk of rising stress.
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Despite potential equity issuance, we see growth challenges as PNB housing loan rates are much higher than peers; disbursal to stressed developer/non-housing segment should stay muted. We cut our FY 20-21E loan book estimate by 13.9%/ 13.5% and forecast a 12% loan CAGR over FY20-22E.
Spread ex assignment rose 15 bps Q-o-Q to 2.26% on lower funding cost (8.21%,-13 bps Q-o-Q). Underlying yields were stable, but NIM fell 24 bps Q-o-Q due to income reversal of `44 crore (related to assignment) and excess cash buffer maintained in 3Q. Marginal funding cost fell 20-25 bps QoQ, but avg yield should steadily moderate, too, on a steady rise in the mix of HL over FY20-22E. Mgmt expects spreads to remain between 200bps and 215bps.
Exposure to 5 stressed pools has fallen 9% since March ’19 to Rs 811 crore (ECL coverage 37%), which is comforting. PNB has confirmed its intention to remain the promoter and maintain a more than 26% stake in the company. This may provide some comfort to lenders/ credit markets. Mgmt now expects to raise `1,500-1,600 crore of equity in 4Q FY20. Potential capital raise at CMP should be EPS dilutive (BV neutral), but should ease concern about gearing and thus may support better valuation multiples.
We factor lower loan book estimate and higher provision. We factor proposed equity issuance of `1,500 crore at CMP. This results in EPS dilution (BV neutral). Our PT rises to `525 (0.9x March 21E BV) as we rollover our valuation.