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Strong quarter; NIMs improve sequentially

Canara Bank (CBK) reported a strong core-PPOP of INR 53bn (+37% YoY, +5% QoQ) driven by controlled opex (+8% YoY, flat QoQ) and strong NII growth (+18% YoY, +10% QoQ, NIMs at 2.86% (+8bps QoQ)). CBK has shifted to the new tax regime (tax rate at 23% in 2Q) leading to a PAT of INR 25.2bn (+90% YoY, +25% QoQ). Asset quality metrics continue to improve with GNPL/NNPL/Restructuring at 6.4%/2.2%/2.0% (-62bps/-29bps/-40bps QoQ). Loan growth was robust at +20% YoY/+5.2% QoQ led by strong growth in the wholesale segment (+24.7% YoY, +6% QoQ). Deposit growth was moderate at 9.8% YoY/+1.4% QoQ with CASA ratio at 32% (-50bps 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. Additionally, shift to the new tax regime would also aid in improvement of RoA to 0.7%/0.8% by FY23E/24E. Maintain BUY with a revised TP of INR 280 (valuing core bank at 0.7x FY24E adj. BVPS).

* Asset quality continues to improve: GNPLs/NNPLs improved to 6.4%/2.2% (-62bps/- 29bps QoQ) and PCR stood at 67.1% (+90bps QoQ). Gross slippages stood at INR 39.5bn (2.3% annualised) and higher quantum of recoveries and upgrades resulted in lower net slippages of 0.3%. MSME, agri and retail accounted for 37%, 34% and 17% of the total slippages respectively. Total Covid related restructuring moderated to 2.0% of loans (vs. 2.4% QoQ) and SMA 0, 1 and 2 (> INR 50mn) improved to 0.96% (vs 1.29% in Jun’22). Management highlighted that so far c.13% of the restructured book has slipped into NPA. ECLGS book stands at INR 190bn and slippages from this book have been limited to 3.5%. We build in credit costs of 1.5%/1.3% over FY23/24E.

* Robust loan growth; Strong NII growth and shift to lower tax regime aids PAT: Overall loan growth was strong at +20% YoY (+5.2% QoQ) driven by strong growth in the corporate segment (+24.7% YoY/+6.0% QoQ). RAM (retail, agri and MSME) grew at +16.4% YoY/+4.5% QoQ. We expect loan book to grow at a CAGR of 16% over FY22- 24E. Deposit growth was moderate at 9.8% YoY/+1.4% QoQ with CASA ratio at 32% (- 50bps QoQ). NIMs for the quarter improved to 2.86% (+8bps QoQ) on account of loan book getting re-priced and management has guided for margins of 2.90% by FY23E. Core-operating profit was strong at INR 53bn (+37% YoY/+5% QoQ) driven by controlled opex (+8% YoY/flat QoQ) and NII growth of 18% YoY/+10% QoQ. The bank has shifted to the new tax regime and tax rate for the quarter stood at 23% (vs 34% over the last 4 qtrs) leading to a PAT of INR 25.2bn (+90% YoY/+25% 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. Additionally, shift to the new tax regime would also aid in improvement of RoA to 0.7%/0.8% by FY23E/24E. Maintain BUY with a revised TP of INR 280 (valuing core bank at 0.7x FY24E adj. BVPS).

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