PNB Housing Finance: We maintain ADD with target price of Rs 1,140

PNB Housing Finance’s (PNBHF) Q2FY26 earnings were ahead of our estimates due to negative credit costs (-57bps). Gross advances growth moderated marginally to 15% YoY amidst weak overall demand and nil disbursements in corporate loans. PNBHF’s pivot toward higher-yielding loans across segments through significant investments in distribution for affordable and emerging segments are likely to aid margins during FY26-FY28E. However, the gradual normalization of credit costs and seasoning of the emerging and affordable portfolio are likely to put pressure on return ratios. Further, the uncertainty around the management succession and subsequently the overall strategy remains an overhang on the stock. We revise our FY26E-FY27E earnings estimates marginally to factor in lower credit costs and maintain ADD with a revised RI-based TP of INR 1,140 (implying 1.4x Sep-27 ABVPS).

Portfolio optimization to arrest NIM compression: PNBHF’s NIMs declined marginally to 3.67% (Q1FY26: 3.74%), with reduction in cost of funds (by 7bps), offset by lower yields. While the current rate cut environment is likely to exert pressure on spreads for prime segment, an increasing share of emerging and affordable segments (49% of disbursements in Q2) is likely to aid NIM reflation during FY26-FY28E.

Credit costs remain negative; normalization yet to play out: Asset quality improved sequentially, with GS-III/NS-III at 1.0%/0.7% and GS-II at 2.2%. Credit costs are likely to remain negative in FY26 on the back of a large written-off pool. However, the seasoning of the emerging and affordable portfolio, along with run-down of these recoveries, is likely to drive credit costs higher and drive RoAs lower.

Management succession; transition toward steady-state profitability key monitorable: PNBHF has pivoted its strategy toward granular retail loans, with an emphasis on high-yielding retail loans to drive profitability. However, throughput at newly added branches remains a key monitorable, along with seasoning of the high-yielding loan portfolio. Further, uncertainty around the management succession post the resignation of Mr. Girish Kousgi and the strategy to be adopted by the new MD and CEO remain an overhang on the stock.

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Source: HDFC Securities Institutional Equities

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