Published on 18/05/2017 2:06:04 PM | Source: Reliance Securities Ltd
Hold Canara Bank Ltd For Target Rs.384.00 - Reliance Sec
Higher Slippages & Ageing of Old NPAs Drag Performance
Canara Bank reported 80.6% YoY and 50% QoQ growth in operating profit to Rs29.7bn led by one-time gain of Rs7bn from partial stake sale in housing subsidiary, CanFin Home and interest income on I-T refund. However, its earnings declined by 33.5% QoQ to Rs2.1bn owing to 82.5% QoQ surge in provisioning expenses to Rs27.1bn. Higher provisioning can primarily be attributed to Management’s decision to increase PCR (Including technical w/o) to 55.6% in 4QFY17 from 52.5% in 3QFY17 along with 39% QoQ rise in slippages to Rs31bn.
Management Commentary & Guidance
* Overall stress level in the Bank’s balance sheet improved to 13% of loan in Mar’17 from the peak of 14.25% in Jun’16. The Management expects higher upgrade and recovery in current fiscal led by speedy resolution of few large NPA accounts.
* Management expects substantial improvement in assets quality in FY18 led by sharp decline in SMA-2 loan outstanding to Rs80bn in 4QFY17 from Rs180bn in 3QFY17. Further, it has guided for fresh slippages ratio of 1.5% in FY18 compared to 3.6% and 7.5% in FY17 and FY16, respectively.
* The Bank looks forward to 11-12% growth in loan book in FY18 led by Retail, SME and Agriculture segments. Further, it aims at improving C/D ratio to ~73-74% from the current level of 69.1%.
* Following improvement in CASA ratio to 32.9% in Mar’17 from 27.4% in Mar’16, the Bank targets a CASA ratio of 35% by Mar’18 led by strong growth in CASA deposits and lower renewal of bulk deposits.
* Higher other income is attributable to sale of 13.45% stake in housing finance subsidiary, CanFin Homes. Following this partial stake sale, Canara Bank holds 30.6% in Can Fin Homes and the Management does not intend to sell any additional stake in near future.
Outlook & Valuation
Following an impressive 45% upsurge in last 4 months, we believe that the current stock price has incorporated most of the near-term positives. Further, we expect the Bank will continue to witness elevated level of credit cost, which will keep its earnings and return ratios subdued over next 3-6 quarters. Rolling over our estimates to FY19E, we change our recommendation on the stock to HOLD from BUY with an upwardly revised Target Price of Rs384 (from Rs360 earlier) based on 1x FY19E Adjusted book value.
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