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Price Analysis

Canara Bank has been reporting consistent growth in net profit since previous ten quarters. In 3QFY23, the profitability increased by 92% YoY and 14% sequentially on the back of lower provisioning expenses. A bulky provision (?54bn) made in 4QFY20 (two years ago), continued to safeguard the balance sheet from delinquencies out of restructuring with PCR (calculated) of 68.2% and PCR (including TWO) of 86.3%. On asset quality front, the GNPA/ NNPA ratio (5.90%/1.96%) improved by 47bps and 23bps respectively on the back of lower NPA addition of ?32bn. The slippages ratio (reported) marginally down at 34bps v/s 35bps in the previous quarter. The cumulative SMA1/2 book also eased to 49bps v/s 51bps in 2QFY23. On the business front, the bank has reported healthy gross credit growth of 13.6% YoY and 2.9% sequentially. The bank’s recoveries are in line with the guidance and expect the credit cost to be below 2% for FY23. Furthermore, the NIMs have expanded by 10bps sequentially to 2.93% driven by higher YOA (7.45% v/s 7.24% in 2QFY23) and slightly higher cost of deposit (4.19% v/s 4.09% in 2QFY23). We believe the bank is growing the balance sheet with well-adjusted margins and it is expected to bode well in near term. Moreover, the CET – 1 (11.45%) has improved with AT-1 bond issues. We believe the hurdles are long behind us and the bank shall witness gradual improvement in profitability with FY24E ROA/ ROE of 1%/17%. In view of inexpensive valuation (0.66x PBVPS) we recommend BUY.

Gazing the core

Asset quality improvement continues: The absolute GNPA is decreasing gradually with moderate slippages and higher recoveries. In 3QFY23, Gross NPA addition were at ?32.1b (down sequentially) while stable recoveries and upgrades along with strong loan growth aided 47bps/23bps decline in the GNPA/NNPA ratios, respectively. PCR (calculated) improved 109bps sequentially to 68.1%. Total SMA overdue (1/2) are stable and stand at 0.34% from 0.14% in 3QFY23. Accounts referred to NCLT stands at ?409bn; the bank has provided 96% of the outstanding dues. Factoring higher recoveries, we estimate the GNPA/ NNPA ratio at 5.6%/1.9% at the end of FY23 with a stable PCR of 68.7%.

Robust business growth across segments: On the business front, the bank has been reporting consistent credit growth with stable CD ratio. In 3QFY23, the bank has reported a healthy 18% YOY and 3.5% sequential growth in net loan book driven by the corporate portfolio (5% QoQ, 20.2% YoY). However, RAM credit growth was 1.8% QoQ and agriculture credit growth was 3.4% QoQ with superior underwriting process. The bank has guided for double-digit advances growth for FY23 and it seems achievable. We have incorporated loan CAGR of 20% for FY22- 24E. Improving CD ratio will keep the NIMs around 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%/17% for FY24E.

Higher profitability continues driven by higher NIMs and stable opex: NIMs have expanded marginally by 10bps sequentially to 2.93% driven by lower YOA (7.45% v/s 7.24% in 2QFY23) and slightly higher cost of deposit (4.19% v/s 4.09% in 2QFY23). Improved NIMs have resulted in 23.8% YoY jump in NII against 18% YoY net credit growth. The bank has reported sequential de-growth in other income of 17%. Nevertheless, with superior operating performance the PPOP and PAT registered a growth of 20% YoY and 92% YoY respectively.

Outlook and Valuation

Factoring near term capital infusion, we expect the bank’s loan book to fatten cautiously at CAGR of ~20% 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% and 17% in FY24E. We value the standalone entity with 0.7xFY24E BVPS (?499) and arrive at a target price of ?349. We recommend BUY with a potential upside of 20%

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