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Canara Bank (CBK) reported a mixed 1Q23 results with a robust loan growth of +14.5% YoY/+5.7% QoQ while NII growth was limited to +10.2% YoY/-3.2% QoQ as NIMs were a tad soft at 2.78% (+7bps YoY,-15bps QoQ). We believe margins were impacted due to growth being driven by lower yielding corporate loans and should improve here on driven by a) re-pricing of loans to pass on the increase in interest rates and b) credit growth to be more broad based. PAT was ahead of our estimates at INR 20bn (+72% YoY/+21% QoQ) largely driven by trading gains of INR 8.9bn (vs 3.5bn loss expected). Asset quality metrics continue to improve with GNPL/NNPL/Restructuring at 7%/2.5%/2.4% (-53bps/-18bps/-40bps QoQ). Loan growth at +14.5% YoY/+6% QoQ was led by strong growth in the wholesale segment (+14% YoY, +8.9% QoQ). Deposit growth was moderate at 9.4% YoY/+2.9% QoQ with CASA ratio at 32.3% (-160bps QoQ). We expect CBK’s earnings recovery to be driven by a) credit cost normalisation (1.3% by FY24E), b) improvement in margins and c) sustained growth momentum. We build in gradual improvement of ROA to 0.66%/0.72% by FY23E/24E. Maintain BUY with a TP of INR 265 (valuing core bank at 0.7x FY24E adj. BVPS)

* Asset quality continues to improve: GNPLs/NNPLs improved to 6.99%/2.48% (-53bps/- 18bps QoQ). Gross slippages stood at INR 39.5bn (2.3% annualised) and higher quantum of recoveries and upgrades resulted in lower net slippages of 0.8%. Total Covid related restructuring moderated to 2.4% of loans (vs. 2.8% QoQ) and SMA 0, 1 and 2 (> INR 50mn) improved to 1.29% (vs 1.53% in Mar’22). Management highlighted that so far 10-11% of the restructured book has slipped into NPA and expects additional slippages from this pool to be limited to 5-8%. We build in credit costs of 1.4%/1.3% over FY23/24E.

* Robust loan growth; but margins were soft: Overall loan growth was strong at +14.5% YoY (+5.7% QoQ) driven by strong growth in the corporate segment (+14% YoY/+% 8.9% QoQ). RAM (retail, agri and MSME) grew at 14.8% YoY/+3.3% QoQ. Deposit growth was moderate at 9.4% YoY/+2.9% QoQ with CASA ratio at 32.3% (-160bps QoQ). NIMs for the quarter were impacted by growth being driven by lower yielding corporate loans and stood at 2.78% (+7bps QoQ/-15bps YoY). Management highlighted the 38% of loan book is linked to repo and expects the re-pricing benefit to flow in 2Q23E, which we believe should lead to uptick in margins. Core-operating profit stood at INR 57bn (+17.5% YoY/+0.7% QoQ) driven by controlled opex (+10.7% YoY/+1.7% QoQ) and strong core non-interest income (+21.1% YoY/+8.8% QoQ), while NII growth was limited to +10.2% YoY/-3.2% QoQ.

* Valuation and view: We expect CBK’s earnings recovery to be driven by a) credit cost normalisation (1.3% by FY24E), b) improvement in margins and c) sustained growth momentum. We build in gradual improvement of RoA to 0.66%/0.72% by FY23E/24E. Maintain BUY with a TP of INR 265 (valuing core bank at 0.7x FY24E adj. BVPS)

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