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NII in line; controlled opex drives earnings beat

Asset quality improves further

* Canara Bank (CBK) reported 2QFY25 standalone PAT at INR40b (11.3% YoY growth, 6% beat) driven by lower opex.

* NII rose 4.6% YoY to INR93.2b (in line). NIM moderated 4bp QoQ to 2.86% during the quarter.

* Loan book grew 10.3% YoY/4% QoQ to INR9.8t, while deposit growth was modest at 9.3% YoY/0.9% QoQ to INR13.5t. CASA ratio stood at ~31.3% in 2QFY25. Management guided 11% credit growth for FY25.

* On the asset quality front, total slippages moderated to INR23.4b (INR33.4b in 1QFY25). GNPA and NNPA ratios improved 41bp and 25bp QoQ to 3.73% and 0.99%, respectively. PCR stood at 74.1%.

* We broadly retain our projections and estimate CBK to deliver FY26E RoA/ RoE of 1.08%/18.9%. Reiterate BUY with a TP of INR125 (premised on 1.1x FY26E ABV).

Deposit growth modest; NIM moderates 4bp QoQ

* CBK reported 2QFY25 standalone PAT at INR40b (11.3% YoY growth, 6% beat) driven by lower opex. In 1HFY25, earnings grew 11% YoY to INR79.2b (2HFY25E at INR83.4b; implying 12% YoY growth).

* NII grew 4.6% YoY to INR93.2b (inline). NIM moderated 4bp QoQ to 2.86%. Other income grew 7.5% YoY to INR49.8b (down 6.4% QoQ; in line). Treasury income stood at INR8.85b vs. INR5.03b in 1QFY25. Total revenue thus grew 5.6% YoY (in line).

* Operating expenses grew 12.2% YoY to INR66.4b (down 3.3% QoQ, 4% lower than MOFSLe). C/I ratio thus moderated 96bp QoQ to 46.5%. PPoP remained flat YoY to INR 76.5b (5% beat).

* Loan book grew 10.3% YoY/4% QoQ, led by the retail segment, which grew 10.7% QoQ. Deposit growth was modest at 9.3% YoY (0.9% QoQ), fueled by CASA deposits. CASA ratio thus increased slightly by 29bp QoQ to ~31.3%.

* GNPA and NNPA ratios improved 41bp and 25bp QoQ to 3.73% and 0.99%, respectively. PCR stood at 74.1%. Total slippages moderated to INR23.4b (INR33.4b in 1QFY25). Credit costs were 0.97% vs. FY25 guidance of 1.1%.

* The total SMA Book increased to 1.48% in 2QFY25 from 1.13% in 1QFY25, due to an increase in the SMA-2 book.

Highlights from the management commentary

* 41% of the book is linked to EBLR, and 48% is linked to MCLR.

* Management guides 11% YoY credit growth for FY25. FY25 credit cost guidance is <1%.

* O/S restructured book was INR140b, of which INR95b were standard asset, and ~INR45b were under NPA.

* The total gold loan book of the bank stood at INR1.65t. The new retail book size of the gold loan product was ~INR280b vs. INR190b in 1QFY25. Avg. yield on this was ~9.15%.

* Slippages break up: INR8b in Agri, INR10b in MSME, and INR5b in Retail.

Valuation and view

CBK reported an earnings beat led by controlled opex, though NIM moderated 4bp sequentially. Loan growth was led by the retail segment, especially the gold loan book, while deposit growth was modest. The CASA ratio witnessed sequential improvement. There has been an improvement in overall asset quality ratios, with slippages also seeing an improvement. Management expects credit costs to be <1% for FY25. However, SMA book increased due to one central government account (metal sector) and another state government guaranteed account. We broadly retain our numbers and estimate CBK to deliver FY26E RoA/RoE of 1.08%/18.9%. Reiterate BUY with a TP of INR125 (premised on 1.1x FY26E ABV).???????

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