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Growth slows, margin slips, but still delivers healthy RoA

Despite margin slip in 1Q due to seasonal factors and change in recognition of penal interest into other income, Canara Bank reported largely in-line earnings with PAT at Rs39bn/1% RoA mainly led by higher PSLC fees at Rs17.5bn and contained provisions. The bank guided for slower growth in FY25 with margins around 2.95-3%, but contained credit costs should help it deliver healthy RoA. Following the implementation of new investment classification norms, the bank’s CET 1 ratio has improved by 50bps QoQ to 12%. However, given the potential impact of ECL, we believe the bank will need to shore-up capital from the market or offload its stake in a few subsidiaries. We slightly trim our earnings estimate for FY25-27 by 2-3% factoring margin pressure, but expect Canara Bank to deliver healthy RoA at 1-1.1%. Thus, we retain BUY on the bank with an unchanged TP of Rs130/share, valuing the standalone bank at 1.1x Jun26E ABV and subsidiaries at Rs6/sh.

Growth remains soft; margin slips QoQ, mainly due to change in classification of penal interest

Canara Bank reported yet another quarter of sluggish credit growth at 10.7% YoY/1.6% QoQ, whereas deposit growth was at 12% YoY/1.7% QoQ, leading to LDR being sticky at ~71%. Moreover, a fall in loan yields due to seasonal factors (higher average assets) and change in recognition policy of penal interest due to RBI regulation, coupled with rising CoF, led to higher-than-expected margin contraction at ~15bps QoQ to 2.9%. Going forward, the bank guided for slower growth in FY25 with margins at 2.95-3%.

Asset quality improves, albeit at a slower pace

Gross slippages were largely contained at Rs33bn/1.6% of loans (despite a seasonallyweak quarter), which coupled with moderate write-offs/recoveries led to reduction in GNPA ratio, albeit at a slower pace of 7bps QoQ to 4.1%. The SMA 1&2 book remained largely stable at 0.7% of loans, but the SMA-0 book shot up to Rs60bn/0.6% (vs Rs15bn/0.2% in Q4) of loans, as seen in the case of Union Bank in 1Q. As per the management, this is mainly due to one large PSU account (~Rs38bn) based out of Andhra Pradesh slipping into SMA. For this, the bank has made 15% provision in 1Q, and hence, does not expect any further impact on provision.

We retain BUY on the stock

We have slightly trimmed our earnings estimate for FY25-27 by 2-3% factoring margin pressure, but expect the bank to deliver healthy RoA at 1-1.1%. Thus, we retain BUY on the bank with unchanged TP of Rs130/share, valuing standalone bank at 1.1x Jun-26E ABV and subsidiaries at Rs6/sh. Key Risks: Further slowdown in growth, margins due to macroeconomic challenges and higher-than-expected increase in provisioning due to new IRACP guidelines and the ensuing ECL impact.

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