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Earnings gaining traction; loan growth revives sharply

Asset quality improvement continues

* Canara Bank (CBK) reported healthy 3QFY22 earnings led by robust NII/Loan growth and controlled provisions. Margin expanded 6bp QoQ aided by improvement in CD ratio. The bank further carried 25% provisions on its SREI exposure (75% coverage now) and provided for the entire pension liability of INR13.55b that resulted in a slight miss in net earnings even as PPoP stood broadly in line with estimates.

* On the business front, CBK reported a sharp 7% QoQ growth in loan book driven by the corporate portfolio (mainly NBFC segment) and guided for double-digit advances growth (9% as on 3QFY22).

* Fresh slippages subsided to INR32.9b, while healthy recoveries and upgrades led to improvements in asset quality ratios. Further, SMA overdue declined to 1.76% from 2.0% in 2QFY22, while restructured portfolio stood at 2.8% of loans. We expect CBK to deliver FY24E RoA/RoE of 0.7%/~13% that will enable a sustained re-rating in the stock. We retain our BUY rating with a TP of INR300 (based on 0.8x Sep-23E ABV), implying 25% upside.

Business growth remains muted; margin stable at ~2.7%

* CBK reported a PAT of INR15b (+116% YoY) led by strong operating performance. NII grew 14% YoY (8% beat) to INR69.4b due to robust loan growth and healthy margin. NIM improved 6bp QoQ to 2.83%.

* Other income dipped 13% YoY (affected by lower treasury gains) that was offset by lower opex. Consequently, PPoP grew 10% YoY (2% beat).

* On the business front, loan growth revived sharply at 7% QoQ led by strong pick-up in corporate portfolio (mainly NBFCs) while share of RAM segment stood at 56%. Deposits growth was at 7% YoY/1% QoQ with CASA mix improving 48bp QoQ to 34.6%.

* On the asset quality front, slippages dropped sharply to INR32.9b (v/s INR69b in 2QFY22 due to SREI) while higher recoveries and upgrades along with robust loan growth aided 62bp/35bp decline in the GNPA/NNPA ratios to 7.8%/2.9%, respectively. PCR improved 122bp QoQ to 65.2%. CBK carried a provision of 75% on the SREI Infra exposure and guided for NPL reductions to remain higher than slippages in the coming quarters.

* Total SMA overdue (0/1/2) dipped to 1.76% from 1.97% in 2QFY22. Further, CBK’s restructured book stood lower at 2.78% v/s 2.85% in 2QFY22.

Highlights of the management commentary

* Slippages breakup: INR4b pertains to 1-2 big accounts while the remaining INR21b pertains to Agri, Retail and SME with slippages of INR5-7b each.

* The bank is targeting to achieve a double-digit loan growth in Gross Advances going ahead.

* CBK targets to achieve a PCR of 84% (including TWO) v/s 83% at present. Overall, the bank is looking to keep the credit cost below 2%.

Valuation and view: Healthy operating performance in 3Q; maintain BUY

CBK reported healthy operating performance supported by a pick-up in loan growth, improving margins and robust asset quality. The bank has posted healthy growth in corporate portfolio while RAM continues to grow at a steady pace. Asset quality ratios improved further underpinned by higher recoveries and upgrades while slippages remained under control. Decline in SMA overdue and restructured portfolio provides comfort on asset quality trends driving a sustained reduction in its credit costs. We estimate an RoA/RoE of 0.7%/~13% by FY24. We maintain our BUY rating with a TP of INR300 (based on 0.8x Sep-23E ABV), implying 25% upside.

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