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Margins power earnings beat; retain BUY

* Canara Bank reported a strong beat on PAT at Rs28.8bn, up 92% YoY (vs our estimate of Rs20.2bn), mainly backed by continued uptick in margins and lower opex. The bank has moved to the new tax regime in 3Q and, thus, effective tax rate has been lower, at 25%, supporting profitability.

* Credit growth was decent at 18% YoY/4% QoQ, largely driven by robust traction in the corporate book. Unlike PVBs, deposit growth was better than the industry run rate at 12%/3% QoQ. However, NIM shot up by 19bps to 3.1% due to continued asset re-pricing and higher yield on balances with the RBI.

* Fresh slippages moderated to Rs32bn/1.9% of loans that, coupled with higher recoveries/w-offs, led to 47bps QoQ reduction in GNPA ratio to 5.9%. Bank has several resolutions lined up (SREI, Religare Finvest, ADAG Group) which are largely written-off and should boost its ‘other income’.

* We raise our earnings estimates by 18-28% over FY23-25, factoring-in better margins, higher recovery from written-off accounts and lower tax rate. We now expect RoA/RoE to improve to 0.9%/17% by FY25E (without considering capital raise). We retain BUY on the stock, with revised TP of Rs385/share, based on 0.9x Dec-24E ABV and subsidiary/investment value of Rs23

Healthy growth coupled with better loan yields lead to sharp margin uptick: Canara Bank reported decent credit growth, at 18% YoY/4% QoQ, owing to healthy traction in the corporate book. RAM book growth slowed down a bit due to contraction in the SME book and some moderation in the retail book. Deposit growth was better than the industry run rate, at 12%/3% QoQ, but CASA ratio slipped to 30% due to deceleration in the SA book. However, NIM shot up by 19bps to 3.1% as a result of continued asset re-pricing and higher yield on balances with the RBI. Going forward, Bank guides for double digit growth of 14-15% and some moderation in NIM at 3% as deposit mobilization at higher cost should have some consequence.

Asset quality continues to improve: Fresh slippages moderated to Rs32bn/1.9% of loans, due to near-absence of corporate slippages that, coupled with higher recoveries/woffs, led to 47bps QoQ reduction in GNPA ratio to 5.9%. The restructured book (RF1 & 2) contracted by 33bps to 1.8% of loans. Bank is confident about keeping net slippages in the negative zone and thus continue to see moderation in NPA ratios. This, along with healthy PCR (68%), should help keep LLP in check.

Outlook & Valuations: We raise our earnings by 18-28% over FY23-25E, factoring-in better margins, higher recovery from written-off accounts and lower tax rate. We now expect RoA/RoE to improve to 0.9%/17% by FY25E (without considering capital raise). We retain BUY on the stock, with a revised TP of Rs385/share, based on 0.9x Dec-24E ABV and subsidiary/investment value of Rs23. Key risks: Slower growth due to macroheadwinds, faster than expected rise in CoF, and delay in lumpy NPA resolutions.

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