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Earnings in line; margin contracts 17bp QoQ Asset quality ratios improve slightly

* Canara Bank (CBK) reported 1QFY25 standalone PAT of INR39.1b (up 10.5% YoY, in line), driven by lower provisions.

* NII grew 5.8% YoY to INR91.7b (5% miss). Margin contracted 17bp QoQ to 2.9% hit by a change in the accounting policy, though management maintained its NIM guidance of 2.95% by exit-FY25.

* On the business front, loan book rose 10.7% YoY/1.6% QoQ to INR9.5t, while deposits grew 12% YoY/1.7% QoQ to INR13.3t. CASA ratio moderated 131bp QoQ to ~31%.

* GNPA/NNPA ratios improved 9bp/3bp QoQ to 4.14%/1.24%. Fresh slippages moderated slightly to INR30.2b from INR30.8b in 4QFY24.

*  We broadly retain our projections and estimate CBK to deliver an FY26E RoA/RoE of 1.1%/19.3%. Reiterate BUY with a TP of INR133 (premised on 1.1x FY26E ABV). Retail advances growth healthy; guides for exit FY25 NIMs of 2.95%

* CBK reported 1QFY25 standalone PAT of INR39.1b (up 10.5% YoY, in line), driven by lower provisions.

* NII grew 5.8% YoY to INR91.7b (5% miss) as the accounting treatment of penal interest has changed from recognizing it as interest income to other income.

Margins moderated 17bp QoQ to 2.9%.

* Other income grew 10.4% YoY to INR53.2b (4% beat). Treasury income stood at INR5.03b vs. INR8.65b in 4QFY24. Total revenues thus grew 7.4% YoY (in line). Provisions came in lower than estimates at INR22.8b (down 16% YoY, 13% lower than MOFSLe).

* Operating expenses grew 16.8% YoY to INR68.7b (down 7.3% QoQ, inline). C/I ratio thus moderated 266bp QoQ to 47.4%. PPoP remained flat YoY to INR 76.2b (4% miss).

* Loan book grew 10.7% YoY (up 1.6% QoQ), led by retail segment, which grew 12.4% QoQ as the bank introduced a retail gold loan product with higher rate of interest. However, it stopped offering gold loans in metropolitan regions for agricultural purpose, leading to the Agri book declining 4.9% QoQ.

* Deposits grew 12% YoY (up 1.7% QoQ) led by term deposits. CASA ratio thus moderated 131bp QoQ to ~31%.

*  GNPA/NNPA ratio improved by 9bp/3bp QoQ to 4.14%/1.24% respectively. Fresh slippages moderated slightly to INR30.2b vs. INR30.8b in 4QFY24. PCR stood at 71%. Credit cost stood at 0.90% as against guidance of 1.1% for FY25.

* The total SMA Book increased to 1.13% in 1QFY25 from 0.69% in 4QFY24, mainly due to one central PSU entity in Andhra Pradesh.

Highlights from the management commentary

* The bank guided NIM to be at ~2.95% by exit-FY25.

* The accounting policy change hurt yields and NII. Earlier, the penal interest was shown in interest income, and now it is shown in other income, and the difference due to this has been ~INR1.5-1.6b.

* Canara Robeco disinvestment is expected to occur in 4Q, which will support CET-1 further.

* INR14b was added due to the new investment guidelines; of this, INR11b was added to reserve, and INR3b has gone to HTM.

* Slippages break up: INR9b in Agri, INR12.2b in MSME, INR5b in Retail, and INR6b in Corporate, including the existing NPA.

Valuation and view

CBK reported a mixed quarter with in-line earnings led by lower provisions, thereby offsetting the muted NII. NIM contracted 17bp QoQ due to a change in the accounting policy; however, management expects NIM at 2.95% for exit-FY25. Loan growth was led by the retail segment, while deposit growth was modest, with the CASA ratio seeing sequential moderation. There has been an improvement in overall asset quality ratios, with slippages seeing a slight improvement. We broadly maintain our earnings and estimate CBK to deliver an FY26E RoA/RoE of 1.1%/19.3%. Reiterate BUY with a TP of INR133 (premised on 1.1x FY26E ABV)

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