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* Canara Bank (CBK) reported a healthy quarter with PAT up 75% YoY to INR35.3b (14% beat), driven by higher ‘other income’. NII grew 28% YoY (in line), while margins moderated marginally by 2bp QoQ to 3.05%.

* On the business front, loan book grew ~15% YoY (3% QoQ), while deposits grew 7% YoY (1% QoQ).

* The asset quality ratios have improved and the management is optimistic about further reducing Net NPA at an accelerated pace. However, the SMA book increased 51% QoQ to INR98.9b.

* We revise our earnings estimates slightly to factor in lower opex and expect CBK to deliver FY25E RoA/RoE of 1.1%/17.3%. We reiterate our BUY rating with a TP of INR425 (0.9x FY25E ABV).

Business growth remains steady; PCR improves to 71%

* CBK reported 1QFY24 PAT of INR35.3b (up 75% YoY; 14% beat), driven by higher ‘other income’ and lower provisions. NII rose 28% YoY (in line) with margins declining 2bp QoQ to 3.05%.

* ‘Other income’ declined 7% YoY (up 1% QoQ, 6% beat to MOFSLe), aided by treasury gain of INR2.9b. Total revenue thus jumped 13% YoY. ? Operating expenses declined 4% QoQ. PPoP thus grew 15% YoY to INR76b (8% beat), while core PPoP grew 28% YoY.

* On the business front, total loans grew 3% QoQ (up 15% YoY), led by both corporate (up 3% QoQ) and the RAM segment (up 3% QoQ) within which Agri book grew ~4.4% QoQ. Deposits grew 6.6% YoY (up 1.1% QoQ); however, CASA deposits declined 1% QoQ, resulting in a 48bp QoQ moderation in CASA ratio to 33%. On the other hand, term deposits experienced a significant QoQ increase of 66%.

* There has been an improvement in the GNPA/NNPA ratio by 20bp/16bp QoQ to 5.2%/1.6%. The PCR also improved further, reaching 70.6%, despite an increase in fresh slippages amounting to INR34.3b. However, provisions declined 12% QoQ to INR27.2b (4% below MOFSLe).

* Total SMA Book increased to 1.11% in 1QFY24 from 0.76% in 4QFY23. Restructured book stood at 160b (1.9% of loans).

Highlights from the management commentary

* Global NIM is expected to be ~3.05%, while credit cost would be 1.2% for FY24.

* The bank had guided for GNPA/NNPA to moderate to 4.5%/1.2% by FY24, but expects to achieve this by 2QFY24.

* The bank has guided for 1% ROA and a 19.5% ROE for FY24.

* The bank has enlisted the services of a consultant to address the revised calculations, and based on their assessment, the ECL provision effect is expected to be in the range of 2% to 2.25% of advances.

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