EUR 120.00 For Business Accounts Only

MOSL : CANARA BANK: Operating performance healthy; loan growth gaining traction

CANARA BANK: Operating performance healthy; loan growth gaining traction

(CBK IN, Mkt Cap USD5.7b, CMP INR259, TP INR340, 31% Upside, Buy)

Asset quality continues to improve

• Canara Bank (CBK) reported a healthy performance with 19% YoY NII growth (3% beat) driven by 8bp margin expansion in 2QFY23. This coupled with healthy treasury gains and traction in fee income drove overall earnings. The bank has further adopted the new tax regime and provided deferred tax worth INR24.5b. Tax rate for 2QFY23 thus came in at 22.7%.
• On the business front, CBK witnessed strong demand momentum as it clocked 6% QoQ/21% YoY growth in advances in 2QFY23. Growth was led by Corporate and Agri segment which grew 6% QoQ. Deposits, on the other hand, grew 1% QoQ led by term deposits as CASA deposits stood flattish.
• Fresh slippages were stable at INR39.5b, while healthy recoveries and upgrades of INR34b along with higher write-offs worth INR28b led to improvements in asset quality ratios during the quarter.
• We increase our PAT estimates by 17%/19% for FY23/24 to account for higher NII, other income, loan growth and lower tax rate. We expect CBK to deliver FY24E RoA/RoE of 1.0%/16.2%, respectively. Maintain BUY with a revised TP of INR340 (premised on 0.8x FY24E ABV).

Margin expands 8bp QoQ to 2.86%; PCR improves to 67%

• CBK posted a PAT of INR25.3b (+90% YoY; significant beat) led by strong other income and beat in NII, which grew 19% YoY (3% beat) due to healthy loan growth and 8bp QoQ expansion in margin to 2.86%. For 1HFY22, NII/PPoP/PAT grew 14%/22%/81% YoY to INR142.2b/INR135.1b/ INR45.5b, respectively.
• Other income rose 13% YoY due to healthy performance in treasury, continued traction in fee income and higher recoveries from written-off accounts. Total revenue thus increased 16% YoY (5% beat).
• Operating expenses jumped 8% YoY, led by rise in other expenses as employee cost was stable. PPoP thus grew 23% YoY to INR69.1b (7% beat).
• On the business front, total loan grew 6% QoQ with strong momentum in Corporate and Agri segment that improved 6% QoQ while Retail/SME grew 4%/3% sequentially.
• Deposits saw weaker trend with 10% YoY/1% QoQ growth. CASA deposits stood flat QoQ while CASA ratio was at 34% (-30bp QoQ).
• Fresh slippages were stable at INR39.5b while higher recoveries, upgrades and write-offs aided 61bp/29bp decline in the GNPA/NNPA ratios to 6.37%/2.19%, respectively. PCR improved to 67% in 2QFY23.
• Further, SMA overdue book declined to 0.96% from 1.29% in 1QFY23, while restructured portfolio declined 30bp to ~2.1% of loans.

Highlights from the management commentary

• The bank believes that growth will continue to see healthy traction and is likely to be in double-digit in FY23 – higher than the earlier guidance of 8%.
• CBK is looking to pass on the benefit of higher spreads to the depositors and has thus launched a new deposit product “666” offering rates at 7% p.a.