Buy Canara Bank Ltd For Target Rs 160 By Emkay Global Financial Services Ltd
Canara Bank (CBK) continues to deliver strong credit growth, at 16% YoY, far outpacing its guidance – a phenomenon seen across PSBs. After a continuous decline for the past 10 quarters, margin surprised positively, up by 9bps QoQ, mainly due to lower CoF. However, weak treasury performance led to a 14% miss on earnings, with PAT at Rs45bn. For FY27, the management guides for conservative credit growth, at 11-12%, but believes that similar to FY26, it would largely surpass the guidance. The bank will focus on protecting margins amid rising cost pressures. It expects ECL impact of Rs100bn (0.8% of loans), which looks manageable, in our view, given its healthy CET 1, at 12.4%. We largely retain our earnings estimates and expect the bank to deliver 1% RoA over FY27-28E, and then moderate to 0.9% in FY29E. We retain BUY, while trimming our TP by ~6% to Rs160 from Rs170, valuing the standalone bank at 1x FY28E ABV and subsidiaries/investments at Rs11/share.
Robust credit growth; margin surprises positively
CBK yet again delivered strong credit growth of 16.3% YoY/4% QoQ, well above guidance, reflecting the broader momentum across PSBs. Growth was driven by robust traction in retail loans, along with gradual improvement in agri and corporate segments, though the MSME portfolio declined 1.8% QoQ. CBK expects gold loans to grow in doubledigits YoY, citing strong branch presence in South India. It also expects ~Rs30bn in PSL income. Deposit growth remained relatively weak, at 7.7% YoY, but improved 3.3% QoQ, led by better CASA mobilization, resulting in a marginal rise in the CASA ratio to 27.3%. Meanwhile, NIM improved by 9bps QoQ to 2.54%, aided by strong loan growth and lower deposit costs. The management also emphasized that it is avoiding low-yield advances and focusing more on RAM lending, which should help protect margins. CBK guides for 11–12% credit growth on a conservative basis and margin at 2.5-2.6%.
Headline asset quality continues to improve
Gross slippages increased to Rs28bn/1.1% of loans, partly offset by higher write-offs, leading to a 24bps QoQ improvement in GNPA to 1.84%. NNPA also improved to 0.43%, while specific PCR declined by 148bps QoQ to 77.1%. Further, the overall SMA book improved to 0.46%, driven by improvement across buckets. As per the management, ECL impact could be ~Rs100bn/0.8% of loans. Apart from the standard provision at Rs45bn, the bank has made prudent provisions of ~Rs18.9bn on three large SMA accounts, even though no provision was required to create some buffers.
We retain BUY on the stock
We largely retain our earnings estimates and expect the bank to deliver 1% RoA over FY27-28E, and then moderate to 0.9% in FY29E. We retain BUY, while trimming our TP by ~6% to Rs160, valuing the standalone bank at 1x FY28E ABV and subsidiaries/investments at Rs11/share. FSIB had recently approved the appointment of Brajesh Kumar Singh (ex-ED, Indian Bank) as MD and CEO at CBK, but it awaits the RBI’s approval. Key risks: Lower-than-expected growth/margins, ECL implementation.
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