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Price Analysis

The Canara Bnak has been reporting consistent growth in net profit since previous thirteen quarters. In 2QFY24, the profitability increased by 42% YoY and 2% sequentially on the back of lower provisioning expenses. A bulky provision (?54bn) made in 4QFY20 (three years ago), continued to safeguard the balance sheet from delinquencies from restructuring with PCR (calculated) of 71.5% and PCR (including TWO) of 89%. On asset quality front, the GNPA/ NNPA ratio (4.76%/1.41%) improved by 39bps and 16bps respectively on the back of stable slippages of ?29bn. The slippages ratio (calculated) marginally down at 137bps annualized v/s 163bps in the previous quarter. The cumulative SMA1/2 book also stable at 11bps/48bps of loan book. On the business front, the bank has reported healthy net credit growth of 13.2% YoY and 4.3% sequentially. The bank’s recoveries are in line with the guidance and expect the credit cost to be below 2% for FY24. Furthermore, the NIMs flat sequentially to 3.02%. We believe the bank is growing the balance sheet with well-adjusted margins and it is expected to bode well in near term. We believe the bank has recovered well and expected to witness gradual improvement in profitability with FY25E ROA/ROE of 1.1%/17.2%. With an inexpensive valuation (0.87x trailing PBVPS) we recommend BUY.

Gazing the core

Asset Quality improvement continues: The absolute GNPA is decreasing gradually with lower slippages and higher recoveries. In 2QFY24, Gross NPA addition were at ?29b (lower sequentially) while stable recoveries and upgrades along with strong loan growth aided 39bps/16bps decline in the GNPA/NNPA ratios, respectively. PCR (calculated) improved 80bps sequentially to 71.44%. Total SMA overdue (1/2) are stable and stand at 0.11% from 0.48% in 2QFY24. Accounts referred to NCLT stands at ?412bn; the bank has provided 97% of the outstanding dues. Factoring higher recoveries, we estimate the GNPA/NNPA ratio at 4.7%/1.5% at the end of FY24 with a stable PCR of 70%.

Robust business growth across segments: On the business front, the bank has been reporting consistent credit growth with stable CD ratio. In 2QFY24, the bank has reported a healthy 13.2% YOY and 4.3% sequential growth in gross loan book driven by the corporate portfolio (2.7% QoQ, 13.75% YoY). Additionally, RAM credit growth was 13.6% YoY and agriculture credit growth was 4.4% QoQ with superior underwriting process. We have incorporated at loan CAGR of 15% for FY23-25E. Improving CD ratio will keep the NIMs around 2.9%. The operating expenses are not likely to witness a sharp jump as the bank has up-fronted the entire pension-related provision of ?13.5bn in 3QFY22 instead of amortizing over the five years as permitted by the RBI. Thus, we estimate a healthy PAT growth with lower provision expenses and ROA/ROE of 1.1%/17.5% for FY25E.

Higher profitability continues; driven by higher NIMs and stable opex: NIMs flat sequentially at 3.05% driven by higher YOA (8.56% v/s 8.43% in 1QFY24) and meaningfully higher cost of deposit (5.35% v/s 5.22% in 1QFY24). An improved NIMs have resulted in 20% YoY jump in NII against 13.2% YoY net credit growth. The bank has reported sequentially lower other income of ?46.4bn. Nevertheless, with superior operating performance the PPOP and PAT registered a growth of 10% YoY and 43% YoY respectively.

Outlook and Valuation:

We expect the bank’s loan book to fatten cautiously at CAGR of ~15% over FY23-25E, led by RAM and corporate book growth. In our opinion, the bank’s credit cost to normalise further by FY24E and estimate return ratio ROA/ROE of 1.1% and 17.5% in FY25E. We value the standalone entity with 0.9xFY25E BVPS (?562) and arrive at a target price of ?506. We recommend BUY with a potential upside of 30%.

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