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In the pink of health - Growth trajectory to remain intact

Re-rating still contingent on CANF’s ability to identify a successor

* CANF, in our view, is a franchise which has proven its astute underwriting, strong risk management, and inclination to deliver industry-leading loan growth in the mortgage sector at least (if not more) over the last decade. This report is expected to draw references from our recent interaction with the senior management of CANF in their corporate office at Bangalore, India.

* What we want to highlight through this report is that despite the vacant MD/CEO position at CANF for over a month, the business momentum under the interim leadership of DMD Amitabh Chatterjee and CFO Prashanth Joishy has remained strong. CANF has long demonstrated that it is a processes-driven organization and that it will continue to demonstrate the same ethos and trajectory even under the leadership of the successor to ex-MD Girish Kousgi.

* Management shared that the Board of Directors (BoD) at CANF is keen to onboard a new MD/CEO from the mortgage sector itself (potentially from the private sector, in our view) by offering a compensation in line with the markets (even though the pay-scale at CANF, which is a subsidiary of public sector Canara Bank, is otherwise lower).

* We believe that the intimation to the exchanges would only come (and appropriately so) when the successor formally joins CANF. While identification of the new CEO is in very advanced stages, it is difficult to put a timeline to when the new candidate’s name will be announced.

* While there could be near-term transitory compression in margins because of the delay in transmitting higher borrowing costs to the customers, we believe it can sustain NIM of ~3.3-3.4% in the medium term. We model a Loan Book/PAT CAGR of 17%/~19%, respectively, over FY22-FY25E. CANF is a franchise with moats on the liability side and has always exhibited superior asset quality. For a RoA/RoE of 1.9%/17% in FY24E and triggers for valuation re-rating if the new management team (of MD&CEO/CFO/CRO) can gain investor confidence, we reiterate our BUY rating with a TP of INR630 premised on 1.8x Sep’24 P/BV.

* Key downside risks are a) inability to attract good talent for senior leadership positions and b) change in parentage (if at all) which could pose a risk to its credit rating and ability to borrow at such low interest rates

Robust franchise; processes orientation has served it well

* Unlike many of its other peers, CANF does not have corporate/builder loans in its loan mix. It has very consistently maintained the share of Home loans in its loan mix at around 90% for the last decade and has consciously stayed away from increasing the proportion of LAP despite the obvious benefits of better spreads/margins. Management in the past has shared that it plans to increase the proportion of LAP over the medium-to-long term.

* What has served CANF really well, in our view, over the last many years, is its process orientation and very little subjectivity/deviations in its credit decisions, which will enable it to flourish even under the leadership of the new MD/CEO.

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