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Higher other income, contained provisions support earnings

* Canara Bank reported a higher-than-expected PAT of Rs16.7bn in Q4 (though slightly lower than consensus), mainly aided by higher other income and lower provisions. Slippages were significantly higher at Rs47.6bn (3% of loans), excluding future retail exposure of Rs12bn on which the bank carries a 60% PCR.

*Overall credit growth was healthy and in line with system at 10% yoy, but margins were largely flat at 2.8% due to interest reversal on a/c of higher slippages. CBK has indicated that the potential notional loss as of now on its investment portfolio seems to be limited to Rs2bn, but we believe rising G-sec yields could keep treasury performance in check.

* CET 1 remains low at 10.3% and thus the bank may look at raising capital via QIP/bonds instead of any stake sale in subsidiaries at this point. As far as its subsidiary CanFin Homes is concerned, the alleged irregularity was in 37 a/cs with a value of

* We expect a gradual improvement in RoA/RoE to 0.6-0.7%/12-15% over FY23-25E from 0.5%/11% in FY22, led by better growth and lower LLP. Retain Buy with a revised TP of Rs282 (vs. Rs290) based on (0.8x FY24E ABV) and subs investment of Rs23.

Healthy growth, stable NIMs: Credit growth was in line with system at 10% yoy/2% qoq, partly dragged by the corporate book, which declined in Q4 as short-term corporate credit would have run-down. NIM was largely stable at 2.8%, partly due to interest reversal on account of higher slippages. CBK has seen a steady improvement in the CASA ratio to 34%, lower than some of its large peers. Given a rising interest rate scenario, we believe higher CASA could help the bank tide over margin pressure.

Slippages shot up; need to shore up provision buffers: CBK reported significantly higher slippages at Rs47.6bn (3% of loans), excluding future retail exposure of Rs12bn on which the bank carries a 60% PCR. However, higher recoveries/upgrades led to a 30bps qoq contraction in the GNPA ratio to 7.5%. The restructuring book remains elevated at Rs195bn (2.8% of loans). However, SMA (0-2) above the Rs50mn portfolio moderated to 1.5% from 1.8% in Dec’21. The bank believes that slippages should moderate in FY23, while better recoveries and transfer to NARCL (Rs40bn) is expected once the ARC is operational.

Outlook and valuations: We expect a gradual improvement in RoA/RoE to 0.6-0.7%/12- 15% over FY23-25E from 0.5%/11% in FY22, led by better growth and lower LLP. Retain Buy with a revised TP of Rs282 (from Rs290) based on (0.8x FY24 ABV) and subs investment of Rs23. CET 1 remains lower at 10.3% and thus the bank may look at raising capital via QIP/bonds, instead of any stake sale in subsidiaries at this point. Key risks to our call/estimates: Higher-than-expected NPA formation, a slower growth trajectory, and a sharp rise in G-Sec yields leading to lower treasury gains.

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