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Canara Bank reported a healthy operating profit of INR 76.0bn (+15% YoY, +5% QoQ) supported by a) stable NIMs at 3.05% (-2bps QoQ), b) moderation in operating expenses (+9.8% YoY, -4.2% QoQ) and c) higher other income driven by PSLC fees, despite modest growth momentum (loan and deposits growth of 13.3% and 6.6% YoY resp.). Increase in cost of funds was set off by upward repricing of yield, which aided stable NIMs and management indicated that they expect the NIMs to stay near current levels going ahead as well. Asset quality metrics continued to show improvement with GNPL/NNPL at 5.15%/1.57% (-20bps/-16bps QoQ) with increase in PCR to 70.6% (+165bps QoQ). Cost to income at 43.61% is one of the lowest in several years, which along with healthy PPOP and moderate credit costs, aided by the bank to report an ROA in excess of 1.0% for the first time after FY2011. We expect CBK’s rerating to continue going ahead driven by a) expansion in return profile RoA/RoE being 1.0%/18.3% by FY25E and b) stable asset quality with moderate credit costs. Maintain a BUY with a TP of INR 395 (valuing core bank at 0.8x FY25E BVPS)

* Modest growth in loans and deposits: Loans grew by 13.3% YoY modest growth across RAM (+3% QoQ, +12.9% YoY) and corporate segment (+2.7% QoQ, +13.8% YoY). Within RAM, agriculture was the fastest growing segments (+4.4% QoQ, +20%% YoY) followed by retail (+1.6% QoQ, +11% YoY) and MSME (+2.26% QoQ, +4.44% YoY). Deposits saw a moderate growth (+7% YoY, 1.1% QoQ), with domestic deposits growing at (+5% YoY, 0.9% QoQ) led by degrowth in CASA deposits (+0.9% YoY, - 0.5% QoQ) and sluggish TD growth (+7% YoY, +1.6% QoQ). Management has taken multiple initiatives targeting CASA, the benefits of which they expect to see in the near term.

* Improvement in asset quality: Asset quality metrics continued to show improvement with GNPL/NNPL at 5.15%/1.57% (-20bps/-16bps QoQ) with increase in PCR to 70.6% (+165bps QoQ). Though gross slippage stood at INR 31.88 bn (1.75% of loans annualised), it was supported by healthy recoveries and upgrades resulting in lower net slippages of 0.74% (annualised). We build in avg. credit costs of 120bps over FY24-25E.

* Healthy operating profit aided by stable NIMs: PPOP was at INR 76.0bn (+15% YoY, +5% QoQ) supported by a) stable NIMs at 3.05% (-2bps QoQ), b) moderation in operating expenses (+9.8% YoY, -4.2% QoQ) and c) higher other income driven by PSLC fees, despite modest growth momentum (loan and deposits growth of 13.3% and 6.6% YoY resp.). Increase in cost of funds was set off by upward repricing of yield, which aided stable NIMs and management indicated that they expect the NIMs to stay near current levels going ahead as well. 52% of the loans are linked to MCLR, of which 80% have been re-priced with 20% expected to be re-priced in near term.

* Valuation and view: We expect CBK’s rerating to continue going ahead driven by a) expansion in return profile RoA/RoE being 1.0%/18.3% by FY25E and b) stable asset quality with moderate credit costs. Maintain a BUY with a TP of INR 395 (valuing core bank at 0.8x FY25E BVPS).

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