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Steady quarter despite wage rate provision impact

Canara Bank (CBK) delivered a steady quarter with PAT at INR 36.6bn (+1.4% QoQ, +26.9% YoY, inline JMFe) on the back of a) robust growth in NII (+5.8% QoQ, +9.5% YoY, +5% JMFe) and b) healthy growth in net advances (+3.2% QoQ, +12.8% YoY). Increase in CoFs (+7 bps QoQ) was off-set by an upward re-pricing of yields, which resulted in NIMs inching up to 3.03% (+3bps QoQ). Though, management anticipates CoFs to have an upward bias going ahead and thereby expects NIMs to stabilize in the range of 2.9-3%. The Cost-toIncome ratio spiked to 50.4% in the quarter due to a wage provision revision from 15% to 17% for 14 months (starting Nov ’22), leading to an INR 4.5 billion increase in the wage bill. Additionally, the revision prompted a provision of INR 2.5 billion for actuaries on retirement benefits, culminating in a total provision of INR 7 billion for employee costs. However, management is confident of ending the fiscal year at the guided level of 45%. Asset quality metrics continued to improve with GNPL/NNPL at 4.39%/1.32% (-37bps QoQ, -8bps QoQ) with PCR at a healthy 71%. Credit cost at 1.06% is one of the lowest in several years, which coupled with healthy NII growth and stable cost to income ratios has helped the bank sustain its RoA above 1% over the past couple of quarters. We expect CBK’s rerating to continue going forward, driven by a) steady NIMs and continued expansion in return profile with RoA/RoE of 1.03%/18.7% by FY26E, and b) stable asset quality with moderate credit costs. We maintain a BUY keeping TP unchanged at INR 485 (valuing core bank at 0.9x FY26E BVPS).

Healthy growth in advances and deposits: Net advances grew by (+3.2% QoQ, +12.8% YoY) with RAM growing by (+2.61% QOQ, +14.56% YoY) and corporate book by (+3.19% QoQ, +8.26% YoY). Within the RAM segment, growth was led by retail credit (+3.66% QoQ, +12.14% YoY), followed by agriculture and allied book (+2.33% QoQ, +19.26% YoY) and MSME book (+1.93% QoQ, +9.46% YoY). The management continues to devote its focus to increasing the share of high yielding RAM credit, which currently forms 56% of the loan book (vs 54% in 3QFY23). Deposits saw a steady growth (+2.5% QoQ, +8.5% YoY) with domestic deposits growing by (+2.05% QoQ, +8.07% YoY) which was led by growth in TD (+2.81% QoQ, +9.53% YoY) though CASA growth remained sluggish at (+0.45% QoQ, +5.05% YoY). The management continues to take initiatives for deposit mobilization so as to be able to achieve its guided CASA ratio of 35% (currently at 31.65%).

Steady headline parameters led by stable margins: Despite a strong growth in NII (+5.8% QoQ, +9.5% YoY), operating profit stood at INR 68.1bn (-10.6% QoQ, -2.1% YoY) due to higher operating expense (+16.6% QoQ, +22.6% YoY). This was a result of revision in wage provision from 15% to 17% for 14 months (starting Nov ’22), leading to an INR 4.5 billion increase in the wage bill. Additionally, the revision prompted a provision of INR 2.5 billion for actuaries on retirement benefits, culminating in a total provision of INR 7 billion for employee costs. However, due to the one-off nature of it, management remains confident of ending the fiscal year with a cost to income ratio of 45%. Increase in CoFs (+7 bps QoQ) was off-set by an upward re-pricing of yields, which resulted in NIMs inching up to 3.03% (+3bps QoQ). However, management anticipates CoFs to have an upward bias going ahead and thereby expects NIMs to stabilize in the range of 2.9-3%.

Improvement in Asset quality: Asset quality metrics continued to improve with GNPL/NNPL at 4.39%/1.32% (-37bps QoQ, -8bps QoQ) with PCR at a healthy 71%. Slippages moderated to INR 27bn (vs INR 29bn in 2QFY24) leading to lowest credit cost of 1.06% for the bank in several years. We build in avg. credit costs of 1.01% for FY24E26E.

Valuation and view: Healthy NII growth coupled with largely stable cost to income ratio and moderation in credit costs has helped the bank to sustain RoAs above 1% over the past couple of quarters. We expect CBK’s rerating to continue going forward, driven by a) steady NIMs and continued expansion in return profile with RoA/RoE at 1.03%/18.7% by FY26E, and b) stable asset quality with moderate credit costs. We maintain a BUY keeping TP unchanged at INR 485 (valuing core bank at 0.9x FY26E BVPS).

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SEBI Registration Number is INM000010361