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Robust growth, new tax regime boosts profitability

* Canara Bank posted a strong beat on PAT at Rs25.3bn (our est: Rs20.3bn), mainly driven by margin improvement and lower tax, albeit partly offset by the prudent higher provisions for shoring-up its specific PCR. Bank has shifted to a new tax regime post adjusting for the DTA which should keep tax rate below 25% in H2FY23 and continue boosting profitability.

* Credit growth surprised positively by 21% YoY/6% QoQ, on strong corporate & retail loan traction. Deposit growth remains moderate, as seen across peers, leading to better LDR. This, coupled with higher interest spreads, led to an 8-bps improvement in NIM to 2.86%. Bank guides for decent double-digit credit growth and NIM of around 2.9%, leading to healthy core-profitability, although likely to partly offset the treasury hit expected in Q3

* Fresh slippages were elevated, but headline GNPA ratio sharply declined by 61bps QoQ to 6.4% due to strong recovery/w-offs. The restructured book, too, witnessed a severe fall, by 42bps to 2.1%. With the NARCL transfer around the corner, the bank expects NPAs to further trend down. Benefiting from the strong profitability/DTA adjustment, CET improved to 11.1%, but higher growth would call for a capital raise in the next 12-15 months.

* We meaningfully raise our earnings estimates by 22-27% over FY23-25, factoring-in the higher credit growth/margin and lower tax rate. We now expect RoA/RoE to improve to 0.9%/17% by FY25E (without considering capital raise). We retain BUY on the stock, with revised TP of Rs330/share, based on 0.7x FY24E ABV and subsidiary/investment value of Rs23. Key risks: MD change in Dec-22, higher run-up in G-Sec yields hurting treasury performance, and macro dislocation leading to stress in the SME book.

* Results – What we liked: Strong credit/margin delivery, sharp improvement in asset quality (GNPA ratio down 61bps QoQ to 6.4%/RSA down 42bps to 2.1% of loans) and steady shoring-up of PCR. What we did not like: Higher growth in the low-margin overseas book, slower deposit/CASA growth and continued elevated slippages.

* Cranking-up the growth machine: Credit growth was higher than expected at 21% YoY/6% QoQ, propped by better growth in the corporate as well as the retail book. Bank has raised its credit growth guidance to a higher double-digit. Deposit growth remains slow, but the bank has increased deposit rates and expects growth to accelerate in H2. Margin expanded 8bps QoQ, aided by better LDR/interest spreads in Q2 which the bank expects to sustain in H2 as well.

* Headline NPAs down, but Bank prudently shores-up PCR: Overall slippages remained higher than expected at Rs39.5bn/2.4% of loans. However, higher recoveries and w-offs along with healthy credit growth led to a 61-bps reduction in GNPA ratio to 6.4%. The restructured book contracted by 42bps to 2.1% of loans. With the NARCL transfer around the corner, NPA ratios should continue trending down. This, coupled with healthy PCR, should also lead to lower LLP, albeit being partly offset by the hit on treasury.

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