Buy Canara Bank Ltd For Target Rs.185 - Emkay Global
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QIP to shore up core capital levels but will need more to support growth
* After the first round of capital raise in Dec’20 (Rs20bn at Rs109 per share), CBK raised Rs25bn this week via the second tranche of QIP at a better price of Rs149.3 per share. We believe that the capital raise will mainly shore up its capital ratios, which remain subpar compared to peers after the merger with Syndicate Bank.
* The second round of QIP was subscribed by LIC (15.9%), BNP Paribas (12.6%), Societe Generale (8%), Indian Bank (6.4%), ICICI Pru Life insurance (6.4%), Morgan Stanley (6.2%) and Volrado Ventures (6.1%). Major investors in the Dec’20 QIP were LIC (25%), BNP Paribas (9.1%), Nippon Life (8.8%) and Societe Generale (7.9%). After the QIP, the government’s stake has fallen to 62.9% from 69.3%.
* The fresh QIP will improve CET-1 by 48bps to 9.3% (8.9% in Q1FY22), Tier-1 to 10.8% (10.3% in Q1FY22) and overall CAR to 13.8% (13.4% in Q1FY22). However, the CET-1 ratio still remains relatively lower vs. the large peers (9.8% - 11.6%). Thus, we believe that CBK needs to further raise capital either from the market or via a stake sale in subsidiaries (Life Insurance/CanFin homes).
* After the capital raise at Rs149.3 per share (0.5x Jun’21 ABV), our estimated ABV for FY22-24 has come down by ~4-5% without factoring in growth/margins related benefits from the capital raise.
* CBK had reduced headline NPAs in Q1 (down 43bps qoq to 8.5%). It has identified NPAs to the tune of Rs51.5bn (0.8% of loans) to be transferred to NARCL. This will further bring down NPAs in Q2/Q3, which could be a near-term positive. CBK has also shored up the specific provision cover to 61%, which otherwise has been an irritant.
* We believe that merger-related concerns are largely behind and the bank should report a gradual improvement in its RoA/RoE to 0.4-0.5%/10-11% by FY23E-24E, led by better growth and moderate LLP. Retain Buy with a TP of Rs185, valuing the core bank at 0.6x Sep’23E ABV and subs at Rs22 per share.
* Key risks to our call/estimates: Higher-than-expected NPA formation in retail/SME, a slower growth trajectory and a sharp rise in G-Sec yields leading to lower treasury gains.
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