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In-line performance; asset quality improves further NIMs compress 5bp QoQ

* Canara Bank (CBK) reported a healthy quarter, with PAT up 43% YoY to INR36.1b (in line), driven by lower provisions. NII grew 20% YoY (in line), while margins moderated 5bp QoQ to 3.0%.

* On the business front, loan book grew ~13% YoY (4% QoQ), driven by healthy traction in retail and corporate loans. Deposits grew 9% YoY (3% QoQ) to INR12.3t, led by 11% YoY growth in term deposits.

* Asset quality ratios have improved and the management expects to further reduce net NPAs at an accelerated pace. SMA book moderated to 0.7% in 2QFY24 vs. 1.1% in 1QFY24.

* We revise our earnings estimates slightly to factor in lower provisions and expect CBK to deliver FY25 RoA/RoE of 1.1%/17.6%. We reiterate our BUY rating with a TP of INR440 (0.9x FY25E ABV).

Business growth steady; PCR improved to 71.4%

* 2QFY24 PAT grew 43% YoY to INR36.1b (in line), driven by lower provisions. NII grew 20% YoY (in line), with margins declining 5bp QoQ to 3.0%. Other income declined 4% YoY (5% miss). Total revenue grew 10% YoY (in line).

* Operating expenses increased by 10% YoY to INR59.2b (in line). PPoP grew 10% YoY to INR76b (in line), while core PPoP grew 13% YoY.

* On the business front, total loans rose 4% QoQ (up 12% YoY), led by both corporate (up 3% QoQ) and RAM segments (up 5% QoQ). Agri book grew ~6.4% QoQ, while Retail and MSME grew ~4% QoQ each. Deposits grew 8.7% YoY (up 3.3% QoQ); however, CASA deposits increased 1% QoQ, leading to a moderation in CASA ratio by 85bp QoQ to 32.2%.

* GNPA/NNPA ratios improved by 39bp/16bp QoQ to 4.76%/1.41%. PCR improved by 88bp QoQ to 71.4%. Fresh slippages stood at INR29.87b vs. INR34.28b in 1QFY24. Provisions declined 28% YoY (4% QoQ) to INR26b (9% below MOSLe).

* SMA book declined to 0.7% in 2QFY24 from 1.1% in 1QFY24. Standard restructured book stood at INR140b (1.57% of loans).

Highlights from the management commentary

* The bank has increased its C/D ratio to 75%. It has excess SLR and is using this to borrow from the RBI and deploy it to earn additional income.

* CBK expects to sustain NIMs at 3-3.05%.

* C/I is expected to remain in the range of 45%.

* The bank expects recovery in some accounts from NCLT, although the pace of recovery is slow. The bank has received INR6.5b through NCLT accounts.

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