IGI Logo

Earnings momentum continues with improvement in credit quality

Price Analysis

Canara Bank has been reporting consistent growth in net profit since last eight quarters. In 1QFY23, the profitability increased by 71.7% yoy and 21.4% sequentially on the back of lower provisioning. A bulky provision (?54bn) made in 4QFY20 (two years ago), continued to safeguard the balance sheet with PCR (calculated) of 67% and PCR (including TWO) of 84.5%. On Asset Quality front, the GNPA/NNPA ratio (6.98%/2.48%) improved by 53bps and 17bps respectively on the back of lower NPA addition of ?39bn v/s ?47bn in the previous quarter. The slippages ratio (reported) marginally down at 36bps v/s 38bps in the previous quarter. The cumulative SMA1/2 book also eased to 56bps v/s 70bps in 4QFY22. On the business front, the bank has reported robust net credit growth of 15% yoy and 6% sequentially. The bank’s recoveries are in line with the guidance and expect the credit cost to be below 2% for FY23. Nevertheless, the NIMs have squeezed by 4bps sequentially to 2.78% driven by lower YOA (7.03% v/s 7.22% in 4QFY22) and slightly higher cost of deposit (3.99% v/s 3.95% in 4QFY22). We believe Canara Bank is trading off between growth and margins which is expected to bode well in near term. Moreover, the CET – 1 (10.49%) is at par; thus we believe the bank may raise capital from stake sales of AMC, HFC and insurance company. We believe the hurdles from merger (with Syndicate Bank) are long behind us and the bank will witness gradual improvement in profitability with FY24E ROA/ROE of 1.2%/18%. With an inexpensive valuation (0.6x PBVPS) we recommend BUY

Asset Quality improvement continues:

The absolute GNPA is decreasing gradually with moderate slippages and higher recoveries. In 1QFY23, Gross NPA addition were at ?39b (v/s ?47b in 4QFY22) while higher recoveries and upgrades along with robust loan growth aided 53bp/17bp decline in the GNPA/NNPA ratios, respectively. PCR (calculated) improved 26bps sequentially to 66.2%. The bank 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 (1/2) are improving and dipped to 0.56% from 0.7% in 4QFY22. Exposure towards Air India stands at ?2bn that has been fully recovered and the bank has an exposure to Future Group but the management is confident that the exposure would remain standard and is unlikely to slip. Factoring higher recoveries, we estimate the GNPA/NNPA ratio at 6.7%/2.3% at the end of FY23 with a stable PCR of 67.5%.

Robust business growth across segments:

On the business front, the bank has been reporting consistent credit growth with improving CD ratio. In 1QFY23, the bank has reported a healthy 15% yoy and 6% sequential growth in loan book driven by the corporate portfolio (8.9% qoq). However, RAM credit growth was 3.3% qoq and agriculture credit growth was 5.5% qoq with superior underwriting process. The gold loan portfolio reached ?1tn mark and grew by 26% yoy and 9% sequentially. The bank has guided for double-digit advances growth for FY23. We have incorporated loan CAGR of 9.2% for FY22-24E. Improving CD ratio will keep the NIMs in a range of 2.8% - 2.9%. The operating expenses are not likely to witness a sharp jump as the bank has up-fronted the entire pension-related provision of ?13.5bn in 3QFY22 instead of amortizing over the five years as permitted by the RBI. Thus, we estimate a healthy PAT growth with lower provision expenses and ROA/ROE of 1%/16% for FY23E.

Higher profitability continues despite lower NIMs:

NIMs have squeezed marginally by 4bps sequentially to 2.78% driven by lower YOA (7.03% v/s 7.22% in 4QFY22) and slightly higher cost of deposit (3.99% v/s 3.95% in 4QFY22). A slightly lower NIMs have resulted in 10.4% yoy jump in NII against 15.2% yoy credit growth. The bank has reported 18% yoy increase in fee income and treasury profit remain healthy at 46% yoy growth despite high bond yield environment. With superior operating performance the PPOP and PAT registered a growth of 15% yoy and 72% yoy respectively.

Outlook and Valuation

Factoring near term capital infusion, we expect the bank’s loan book to fatten cautiously at CAGR of ~10% over FY22-24E, led by RAM and corporate book growth. In our opinion, the bank’s credit cost shall normalise further by FY23E and estimate return ratio ROA/ROE of 1.2% and 17.8% in FY24E. We value the standalone entity with 0.6xFY24E BVPS (?527) and arrive at a target price of Rs316. We recommend BUY with a potential upside of 41%.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at www.lkpsec.com/#foo

SEBI Registration number is INM000002483

Above views are of the author and not of the website kindly read disclaimer