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Strong quarter; robust loan growth and NIM expansion

Canara Bank reported a strong quarter with a robust core-PPOP of INR 53.7bn (+60% YoY, +1% QoQ) driven by healthy NII growth (+23.8% YoY, +15.7% QoQ) aided by NIMs at 3.05% (+19bps QoQ) and controlled opex (-7.8% YoY, +5.2% QoQ). Further, credit costs were at lowest levels since AQR at 1.0% (annualised) resulting in a sharp improvement in PAT to INR 28.8bn (+92.8% YoY, +14.1% QoQ). Asset quality metrics continued to improve with GNPL/NNPL at 5.90%/1.96% (-48bps/-23bps QoQ). Domestic loan growth was +14% YoY, +3% QoQ led by strong growth in the wholesale segment (+20.2% YoY, +5.1% QoQ) while RAM segment growth was at +13.8% YoY, +1.8% QoQ. Further, international loan book continues to witness solid growth at +13.5% QoQ, +81% YoY while deposit growth was moderate at 11.5% YoY/+2.6% QoQ with CASA ratio at 30% (-150bps QoQ). We watch the NIM trajectory given that the benefits of repricing have largely played out and expect NIMs to stabilize in the near term. For CBK, we build credit costs of 119 bps over FY24-25E) leading to improvement of RoA to 0.9% by FY24E/FY25E. Maintain BUY with a revised TP of INR 355 (valuing the core bank at 0.8x FY25E BVPS).

* Loan growth remains strong, with NIMs continuing to expand:

Loan growth remained robust (+18% YoY, +3.5% QoQ) and management remains confident on sustaining growth momentum going forward. Domestic loan growth was +14% YoY, +3% QoQ led by strong growth in the wholesale segment (+20.2% YoY, +5.1% QoQ) while RAM segment growth was at +13.8% YoY, +1.8% QoQ. Further, international loan book continues to witness solid growth at +13.5% QoQ, +81% YoY. Deposits saw a moderate growth (+11.5% YoY, +2.6% QoQ), domestic deposits (93% of total deposits) growing at +9.2% YoY/ +2.2% QoQ. Management indicated that they have taken various steps to increase the deposit growth which should start yielding result going ahead. NIMs expanded to 3.05% (+22bps YoY/+19 bps QoQ) on account of faster repricing of asset yields (floating portfolio accounting for 87% - MCLR based 49%, repo linked 38%) as against cost of deposits with rising interest rate scenario. Management expects NIMs to sustain at ~3% in the coming quarters.

* Improvement in asset quality:

Asset quality improved with GNPL/NNPL at 5.90%/1.96% (- 48bps/-23bps QoQ) and PCR stood at 68.1% (vs. 67.1% QoQ). Slippage remained subdued at INR 32.1bn (1.7% in vs. 2.3% QoQ) and with strong recoveries and upgrades of INR 27.2bn, leading to net slippages of 0.3%. Total SMA1&2 stood at 0.49% vs 0.45% QoQ. We expect gradual improvement in asset quality to CBK to continue in the medium term and build in credit costs of 119 bps over FY24-25E.

* Valuation: We expect CBK’s earnings recovery to be driven by a) continued loan growth momentum, b) stability in margins and c) improved asset quality leading to credit cost normalisation (we build credit costs of 119 bps over FY24-25E) leading to improvement of RoA to 0.9% by FY24E/FY25E. Maintain BUY with a revised TP of INR 355 (valuing the core bank at 0.8x FY25E BVPS).

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