What’s In It For PNB Housing Finance Suitors

Punjab National Bank plans to sell a substantial stake in its mortgage lending arm, PNB Housing Finance Ltd., as the state-run lender looks to raise funds to shore up its capital base.

That's when its capital adequacy has fallen short of the regulatory requirement due to losses suffered in the fourth quarter of the financial year ended March 2018, partly due to the fallout of the Rs 14,000-crore fraud involving jewellers Nirav Modi, Mehul Choksi and their firms.

India's second-largest public sector bank sold its stake in PNB Principal Asset Management to joint venture partner Principal AMC. That was part of its effort to monetise non-core assets in line with the government's reforms agenda for state-owned banks facing mounting bad loans and scams.

And multiple suitors are in the fray for a stake in PNB Housing Finance, according to reports by the Economic Times. Here's what's in it for a potential buyer:

What's On Offer

Punjab National Bank and Carlyle Group-backed investment firm Quality Investment Holdings together plan to sell at least 51 percent in PNB Housing Finance, the bank said in an exchange filing in July. PNB and Quality Investment Holdings owned 32.8 percent and 32.3 percent, respectively, as of June 30.

PNB Housing Finance, which went public in November 2016, has returned over 80 percent to investors.

What's In It For The Buyer?

PNB Housing Finance is India's fifth-largest housing finance company by assets and market capitalisation. It offers a secured housing portfolio of near Rs 64,000 crore and has a well-diversified advances book in terms of customers, geography and product.

The company is present in 48 cities across the country, unlike regional peer Repco Home Finance Ltd. It had 85 branches as on June 30.

Loan book of the housing finance company has grown nearly tenfold over the last five years, an annualised rate of 56.5 percent, to Rs 62,252 crore as of March 2018. Net profit rose 55.5 percent every year during the period. Yet, its bad loans are among the lowest in the industry—at 0.5 percent of the gross advances.

PNB Housing Finance's return ratios are not the best in the industry. Its return on assets at 1.5 percent is lower than peers like Housing Development Finance Corporation Ltd., Indiabulls Housing Finance Ltd., Gruh Finance Ltd., Can Fin Homes Ltd. and Repco Home Finance.

The stock, which trades at 3.2 times its estimated price-to-book value for FY19, is expensive compared with some of its peers.

Likely Suitors

Here's how each of the suitors fare according to analysts:

HDFC

The Economic Times on June 25 reported that HDFC and Kotak Mahindra Bank Ltd. are competing for a controlling stake in PNB's housing finance arm. HDFC, in an exchange filing, denied the report.

India's largest mortgage lender's disbursements for six months are equal to PNB Housing Finance's entire loan book.

“For HDFC, it would mean a portfolio buyout which would add about 20 percent to its book,” said Digant Haria, assistant vice-president, equity research at Antique Broking. Also, some personnel had moved from HDFC to PNB Housing Finance. “So, cultures of both companies are similar.”

HDFC raised Rs 13,000 crore for infusing capital into subsidiaries and for buyouts. An all-cash deal will make the offer more attractive to Punjab National Bank, which needs capital.

Bandhan Bank

On Aug. 23, the Economic Times reported that private lender Bandhan Bank Ltd. joined the fray to pick up a stake in PNB Housing Finance. The lender has yet to respond to BloombergQuint's emailed queries.

PNB Housing Finance is twice the size of Bandhan Bank by assets under management.

While a secured housing portfolio and retail customer base to cross-sell can be possible motivators for Bandhan Bank, the bigger trigger may be the RBI's mandate to lower promoter stake.

Macquarie, however, said a potential deal with be significantly return-on-equity-dilutive for Bandhan Bank and will introduce several integration risks, according to an Aug. 22 note by Nishant Shah, senior associate analyst (banking, financial services and insurance)-equity research, at the brokerage. “We estimate Bandhan Bank's return-on-equity can decline 400-500 basis points if the merger were to take place.”

Kotak Mahindra Bank

The central bank's mandate to lower promoter shareholding may be a trigger for Kotak Mahindra Bank's potential buy.

But a merger with PNB Housing Finance will help Uday Kotak, managing director and chief executive officer at Kotak Mahindra Bank, dilute only about 2 percent stake out of the required 10 percent reduction by December 2018, Haria of Antique Broking estimates.

“A deal with Kotak Bank seems unlikely given that both are urban-focused lenders and hence may have some customer overlap,” Haria said. “Also, Kotak Bank may not offer an all-cash bid, not making it a very attractive bid for Punjab National Bank.”

Private Equity Funds

There is a huge possibility that a consortium of private equity investors will pick up a stake, according to Nidhesh Jain, research analyst at Investec.

Among the private equity investors that have shown interest, according to a report by the Economic Times, are Blackstone, KKR, Bain Capital, Apax Partners, Temasek and Canada Pension Plan Investment Board.

Private equity funds Carlyle, via its arm, and General Atlantic Singapore Fund together hold 42.27 percent in the housing finance lender.

In response to BloombergQuint's emailed queries, Kotak Mahindra Bank, KKR, CPPIB, and Apax Partners refused to comment on market speculation. Blackstone and Temasek have yet to respond to emailed queries, and Bain Capital declined to comment over the phone.