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Loan growth steady; treasury gains support earnings

Asset quality continues to improve

Canara Bank (CBK) reported a steady operating performance with NII growth of 10% YoY (7% miss). Healthy treasury gains and traction in fee income led to 13% beat in total revenue (16% YoY). Margin contracted 15bp QoQ to 2.8% while PPoP grew 21% YoY (18% YoY rise in Core PPoP).

On the business front, CBK witnessed strong demand momentum as it clocked 6% QoQ/15% YoY growth in advances. Growth was driven by the corporate segment with a sharp jump of 8.9% QoQ. Thus, the share of corporate in mix improved 160bp to 46.6%. Deposits, conversely, grew 3% QoQ led by term deposits as CASA deposits saw a sequential decline of 2%.

Fresh slippages moderated 17% QoQ to INR39.5b, while healthy recoveries and upgrades of INR22.3b along with higher write-offs worth INR26.4b led to improvements in asset quality ratios. GNPA/NNPA improved 53bp/17bp QoQ to 6.98%/2.48%, respectively.

Further, SMA overdue declined to 1.29% from 1.53% in 4QFY22, while the restructured portfolio improved 36bp to ~2.4% of loans. We raise our PAT estimates by 14%/16% for FY23/24, respectively, to account for higher other income and loan growth. We expect CBK to deliver FY24E RoA/RoE of 0.8%/13.8%. Retain BUY with a TP of INR300 (based on 0.8x FY24E ABV)

Surprising treasury performance led to earnings beat; PCR stable at 66%

* CBK reported a PAT of INR20.2b (+72% YoY) fueled by strong treasury gains. NII grew 10% YoY (7% miss), aided by healthy 15% YoY loan growth while margin contraction of 15bp QoQ acted as a drag.

* Other income surged 25% YoY due to robust performance in treasury and traction in fee income. Total revenue, thus, grew 16% YoY (13% beat).

* Operating expenses rose 11% YoY due to rise in other expenses as employee cost was stable. PPoP, thus, grew 21% YoY to INR66.1b (14% beat).

* On the business front, demand for loans witnessed strong momentum with a sharp growth of 8.9% QoQ in corporate segment. Share of corporate in mix thus improved 160bp to 46.6%.

* Deposits saw weaker trend with a growth of 9% YoY/3% QoQ. CASA deposits declined 2% QoQ, while CASA ratio stood at 34.3% (-160bp QoQ).

* Fresh slippages moderated 17% QoQ to INR39.5b while higher recoveries, upgrades and write offs aided 53bp/17bp decline in the GNPA/NNPA ratios to 6.98%/2.48%, respectively. PCR remained stable at 66%.

Highlights from the management commentary

* Management is confident of sustaining growth in advances led by a broadbased performance across all segments

* CASA deposits should see a double-digit growth in 2QFY23 after a soft 1Q.

* NIMs should improve as CBK benefits from higher interest rates over the next few quarters.

Valuation and view: Building foundation for stronger return; maintain BUY

CBK reported a steady operating performance supported by healthy loan growth and improvement in asset quality while NII growth was soft as margin contracted 15bp QoQ. However, management expects to recoup this as the benefit of rising rate will flow through in the coming quarters. Loan growth was led by the corporate segment and outlook for rest of the year is encouraging as CBK aspires for a 15% growth in FY23. Slippages were flat sequentially, despite downgrade of a lumpy corporate account. Asset quality ratios improved further underpinned by higher recoveries and upgrades. Declines in SMA overdue and restructured portfolio provide incremental comfort on asset quality trends. We estimate an RoA/RoE of 0.8%/13.8% by FY24. Maintain BUY with a TP of INR300 (based on 0.8x FY24E ABV).

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