Q3 PAT grew 58% y-o-y to Rs 2.2 bn, in line with our estimates. NII surprised positively due to stronger loan growth, but this was offset by higher costs. Asset quality was stable. We lift our FY18-19e EPS by 8/6%. We believe strong loan growth should offset modest spread compression and drive 37% EPS CAGR over FY17-20e. At 3.1x FY19e BV, valuations are at a premium, but this should sustain unless growth or asset quality slips, unlikely near term. Maintain Buy. Loan growth beat, but led by non-housing loans: Loan grew 61% y-o-y, 6% ahead of estimate. Home loan grew 50.6% y-o-y, but beat was led by non-housing loans (79.6% y-o-y) and project loans (79.6% y-o-y). Home loan disbursal grew 62% y-o-y , while disbursal growth in non-housing segment (2.5x y-o-y) was boosted by lumpy disbursal in lease rental discounting segment (LRD). Project loan disbursal grew 3.5x y-o-y, though off low base last year. Home loan mix fell 150bps q-o-q to 57%. PNBHFL has added 17 branches (+27%) in 9MFY18. Home loan growth remains strong despite sector headwinds. Continued mix shift towards riskier non-housing loans could be a concern. We believe Q3 loan growth won’t sustain, but branch expansions, balanced asset mix and competitive pricing should drive 33% loan CAGR over next two years.
Reported spreads rose 8 bps q-o-q to 2.5%: Average yields fell 20bps q-o-q to 9.9%, but lower funding cost (-28bps q-o-q), led to higher spreads q-o-q. Mix of CPs (+210bps q-o-q) and bank loans rose 340bps q-o-q, while NCD (-260bps q-o-q) mix fell q-o-q. We believe borrowing cost has bottomed out and could edge higher, given rising bond yields. Spread should moderate vs. Q3. We forecast spreads of 210 bps over FY18-20e.
Cost to income higher than expected: Cost to income was 24% (-254bps y-o-y, 118bps q-o-q) vs. our 23.3% estimate. Opex to average asset was stable q-o-q at 0.95% (FY17 0.98%). Branch additions could keep opex to asset ratio elevated near term, but this should fall 26bps over FY17-20e as utilisation of new branches improve. Asset quality and credit costs stable: GNPA rose 8bps q-o-q to 0.42%. Credit cost was stable at 0.43%. Provisions included contingency provision of Rs 105 mn in Q3 (`365 mn 9M).
Valuation/Risks: We lift our AUM forecasts by 12-13%, but trim our NIM forecasts. PNBHFL is trading at 3x FY19E BV (21x FY19E EPS) vs. HFC average 3.3x. We believe premium valuations reflect stronger growth. Our PT based on RI model is `1,740. Risks: Slower loan growth, lower than expected spreads, sharp rise in GNPA.