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Lower provisions aid earnings; asset quality improves

RoA to expand further

* Canara Bank (CBK) reported 3QFY24 standalone PAT at INR36.6b (up 27% YoY, in line), driven by lower provisions. NII grew 9.5% YoY (in line), while margins improved 3bp QoQ to 3.03%.

* Other income grew 8% YoY to INR43b (down 7% QoQ, 6% miss). Opex grew 23% YoY to INR69.1b (17% QoQ growth, 8% beat). PPoP, thus, declined 2% YoY (7% miss). The C/I ratio rose to 50.4% due to wage revisions at 17%.

* On the business front, the loan book grew 13% YoY (3.2% QoQ), driven by healthy traction in retail and corporate loans. Deposits grew 8.5% YoY (2.5% QoQ) to INR12.6t, led by 14% YoY growth in term deposits. The CASA ratio, thus, moderated 50bp QoQ to 31.7%.

* Asset quality ratios improved significantly, with credit costs falling below 1%. Fresh slippages stood at INR26.97b vs. INR29.87b in 2QFY24. RoA/RoE stood at 1.01%/21.95%.

* We broadly maintain our EPS estimates and expect CBK to deliver FY25E RoA/RoE of 1.1%/19.5%. Reiterate BUY with a TP of INR570.

Business growth steady; Margins improved 3bp QoQ

* CBK reported 3QFY24 standalone PAT at INR36.6b (up 27% YoY, in line), driven by lower provisions. NII grew 9.5% YoY (in line), while margins improved 3bp QoQ to 3.03%.

* Other income increased by 8% YoY to INR43b (6% miss, 7% QoQ decline). Total revenue grew 9% YoY (in line).

* Operating expenses grew 23% YoY to INR69.1b (up 17% QoQ, 8% beat) due to an increase in wage-related expenses. PPoP declined 2% YoY (7% miss). Treasury income stood at INR4.95b in 3QFY24 vs. INR5.87b in 2QFY24.

* On the business front, total loans grew 3.2% QoQ (up 13% YoY), led by both corporate (up 3% QoQ) and RAM segment (up 4% QoQ). Agri book grew 2.3% QoQ (up 19% YoY) and MSME grew 1.9% QoQ (up 9.5% YoY). Deposits rose 8.5% YoY (up 2.5% QoQ); however, CASA deposits remained stable, leading to a moderation in the CASA ratio by 50bp QoQ to 31.7%. Term deposits increased 14% YoY.

* GNPA/NNPA ratios improved by 37bp/9bp QoQ to 4.39%/1.32%. PCR stood at 71%. Fresh slippages came in at INR26.97b vs INR29.87b in 2QFY24. Provisions declined 39% YoY (29% lower than our estimate). SMA Book increased to 0.8% in 3QFY24 from 0.7% in 2QFY24.

Highlights from the management commentary

* The C/I ratio was high due to wage revision settlement at 17%, as the bank fully provided the shortfall of wage revisions as of Dec’23.

* CBK expects to sustain NIMs near 3.0%.

* The bank remains confident of growing advances at 12%+ YoY.

* The bank has made additional provisions of INR7b — INR2.5b for actuarial pension and INR4.5b for wage revisions over and above previously made.

Valuation and view

CBK reported an in-line performance as earnings growth was steady, led by lower provisions, and as asset quality improved. NII growth too was healthy, leading to a 3bp QoQ margin expansion. However, the management expects NIMs to remain under pressure due to rising cost of funds. Operating profit declined due to high opex. Loan growth was led by Corporate and Retail segments, and the outlook remains encouraging. Sequential improvement in slippages, along with healthy recoveries and upgrades, led to improvements in asset quality ratios. We broadly maintain our earnings estimates and expect CBK to deliver FY25E RoA/RoE of 1.1%/19.5%. We reiterate our BUY rating with a TP of INR570 (1x Sep’25E ABV).

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