PNB Housing Finance: Uncertainty Returns As Carlyle Deal Falls Through

PNB Housing Finance, a subsidiary of Punjab National Bank Ltd., finds itself back at square one as capital raising plans fall through once again.

On Thursday, the non-bank lender informed stock exchanges that it no longer intends to pursue a preferential issue with a group of investors led by a Carlyle Group entity. Had the deal gone through, the Carlyle Group would have held close to 50% in PNB Housing Finance, helping ease concerns about capital availability and growth.

The deal fell through as regulatory and legal hurdles had delayed its closure, PNB Housing said in its notice to exchanges. This is the second time PNB Housing's capital raising plans have been delayed. An earlier attempt by parent PNB to infuse funds into the subsidiary had not received clearance from the banking regulator.

With deal being called off, concerns related to asset quality and growth re-emerge, said ICICI Securities in a note dated October 15. The brokerage house downgraded the stock from a 'Buy' to a 'Sell'.

PNB Housing Finance stock had almost doubled since the announcement of capital infusion in May 2021, the brokerage house said. "With the deal being called off, stock is likely to derate again to 0.75x FY23 estimated book (from 1x currently) as earnings and growth momentum would derail."

A sharp correction in the stock is likely in the near term but this may be short-lived, said Morgan Stanley, cutting the stock to ‘Equal Weight’ from ‘Overweight’.

“As we've seen, key shareholders are willing to support business growth, which should put a floor under the stock. Hence, we'd see any sharp correction and/or any fresh equity infusion announcement as a reason to upgrade to Overweight.”

The non-bank lender will now need to stitch together fresh capital raising plans as it needs funds to provision against rising bad loans. Its provision coverage ratio is also relatively low.

The company's gross non-performing assets had risen to 6% as of the June 2021 quarter compared to 4.4% the previous quarter. Its net NPA ratio stood at 3.61%.

According to an investor presentation made by the company in August, the provision coverage ratio against stage 3 assets, or loans overdue by 90 days, was at just under 40%. Should bad loans rise further, more funds will be required to step up provisions.

The non-bank lender's gearing ratio at 6.4 times is also on the higher side. Its capital adequacy ratio stood at 21.4% at the end of the June quarter.

"Capital infusion is must and the board too has taken cognisance of capital raising requirement at the earliest. However, the question now is what quantum will be raised and what mode will be evaluated," said ICICI Securities. "We believe it is unlikely to be as reassuring as the proposed preferential issue of Rs 4,000 crore (to existing PEs) that is now terminated."

PNB Housing Finance has been executing a business turnaround, and the large equity infusion it proposed could have boosted the pace, said Morgan Stanley.

“We now assume no capital raising until there is information. We have cut assumptions for loan growth, margins, etc,” it added.