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Asset quality continues to improve

* Canara Bank (CBK) reported a mixed quarter with PAT up 91% YoY to INR31.7b (in line), driven by higher ‘other income’ even as NII/PPoP saw a miss. NII grew 23% YoY (8% miss), while margins expanded marginally by 2bp QoQ to 3.07%.

* On the business front, loan growth sustained its momentum at ~18% YoY, while deposits grew 9% YoY (1.4% QoQ), aided by higher growth in CASA deposits.

* The asset quality ratios have shown improvement due to moderation in fresh slippages and the combined effect of healthy recoveries, upgrades and write-offs.

* We revise our estimates slightly to factor in lower provisions and expect CBK to deliver FY25E RoA/RoE of 1.1%/17.8%. We reiterate our BUY rating with an unchanged TP of INR400 (premised on 0.9x Sep’24E ABV).

Business growth remains steady; PCR improves to 69%

* CBK reported a PAT of INR31.7b (up 91% YoY; inline), driven by higher ‘other income’ and lower provisions. NII rose 23% YoY (8% miss) with margins largely flat QoQ at 3.07%. For FY23, NII/PPoP/PAT rose 19%/20%/51% YoY to INR314b/INR277b/INR106.

* Other income grew 7% YoY (20% QoQ), aided by higher recovery from written-off accounts of INR21.7b and strong fee income, which grew 19% QoQ. Total revenue thus jumped 17% YoY. Treasury gains stood at INR1.5b.

* Operating expenses increased 17% YoY. PPoP thus grew 17% YoY to INR75.5b (5% miss), while core PPoP grew 25% YoY.

* On the business front, total loans grew 1.7% QoQ (up 18% YoY), led by both corporate (up 2% QoQ) and RAM segment (up 3% QoQ) within which Agri book grew ~5% QoQ. Deposits grew 8.5% YoY (up 1.4% QoQ), led by CASA deposits, which increased 4.3% QoQ, while term deposits stood flat QoQ. CASA ratio thus increased to 33.5% (92bp QoQ).

* Fresh slippages moderated to INR29.7b, which coupled with higher recoveries, upgrades, and write-offs resulted in an improvement in GNPA/NNPA ratio by 54bp/23bp to 5.4%/1.7%. PCR improved further to 68.9%.

* Total SMA Book increased marginally to 0.76% from 0.71% in 3QFY23.

Highlights from the management commentary

* Credit growth guidance for FY24 stands at 10.5% with NIMs to be ~3.05% v/s 2.95% in FY23.

* Credit cost guidance stands at ~1.2% for FY24.

* The bank has guided for 1% ROA for FY24.

* If implemented, the total requirement under IND-AS is expected to be ~INR420b, which is expected to be distributed over a span of five years. Thus, additional provision of INR80b will be required for the first year (20%).

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