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Steady quarter

JM Financial Institutional Securities Limited JM Financial Research is also available on: Bloomberg - JMFR , Thomson Publisher & Reuters, S&P Capital IQ, FactSet and Visible Alpha Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Certification. Canara bank (CBK) reported steady headline parameters with PAT at INR 37.6bn (+18.3% YoY, +2.8% QoQ) and steady growth in net advances (+12.2% YoY, +1.2% QoQ). Despite an increase in CoFs, reported NIMs expanded to 3.07% (+4bps QoQ), which mgmt. indicated was a result of their gradual efforts to rejig the bank’s exposure of older low yielding corporate book by either renewing them at current yields which are higher or by replacing them with other products that offer more favourable returns. On the back of this, mgmt. guides for NIMs to remain stable at ~3% going forward. Staff costs remained slightly elevated which mgmt. clarified was primarily driven by actual provisions and gratuity benefits related to previous wage hike, totalling INR 3.5bn as against earlier estimated amount of INR 2.5bn. However, mgmt. remains confident of employee costs to stabilise hereon and expects cost to income ratio to be restricted to 47%. Asset quality metrics continued to improve with GNPL/NNPL at 4.23%/1.27% (-16bps QoQ, -5bps QoQ) and PCR at a healthy 71%. With the bank consistently maintaining stable NIMs, ongoing moderation in credit costs and sustained RoA of ~1% for several quarters, we expect CBK’s rerating to continue going ahead. We build in RoA/ROE of 1.02%/16.7% by FY26E. We maintain BUY with a revised TP of INR 600 (valuing core bank at 1.0x FY26E BVPS)

Healthy growth in advances and deposits: Net advances grew (+12.2% YoY, +1.2% QoQ) with RAM growing (+13.5% YoY, +2.1% QoQ) and corporate book de-growing sequentially (-0.2%, +8.6% YoY). Mgmt. indicated that they are gradually in the process of rejigging their exposure of older low yielding corporate book by either renewing them at current yields which are higher or by replacing them with other products that offer more favourable returns. Within RAM, growth was led by agriculture and allied book (+18.7% YoY, +4.4% QoQ), followed by retail book (+11.7% YoY, +1.8% QoQ) and MSME book (+6.7% YoY, -1.8% QoQ). RAM credit now forms 56% of the book (vs 55% in 4QFY23). Deposits saw a healthy growth (+11.3% YoY, +3.9% QoQ) with CASA ratio improving to 32.39%. On the back of new product launches and various government tieups, current deposits saw a robust growth of (+34.2% YoY, +41.4% QoQ). Mgmt. continues to introduce new products and take new tech initiatives to mobilize CASA.

Steady operational performance; Margins sustain: Operating profit increased to INR 73.9bn (+8.6% QoQ, +1.9% YoY) led by a) healthy growth in NII (+11.2% YoY, +1.7% QoQ), b) robust other income (+9.3% YoY, +21.5% QoQ), and c) moderation of C/I ratio to 50.1% (-29bps QoQ). Mgmt. clarified that the slight elevation in staff costs was primarily driven by actual provisions and gratuity benefits related to previous wage hike, totalling INR 3.5bn as against earlier estimated amount of INR 2.5bn. However, mgmt. remains confident of employee costs to stabilise hereon and expects cost to income ratio to be restricted to 47%. Increase in CoFs (+7bps QoQ) was offset by an upward re-pricing of yields (+11bps QoQ), which resulted in NIMs inching up to 3.07% (+4bps QoQ). Mgmt. guides for NIMs to remain stable at ~3% as they actively try to rejig their exposure of older low yielding corporate book.

Asset quality continues to improve: Headline asset quality metrics continued to improve with GNPL/NNPL at 4.23%/1.27% (-16bps QoQ, -5bps QoQ) with PCR at a healthy 71%. Though slippages stood at INR 34bn, cash recoveries and upgradation surpassed it at INR 36.8bn. Mgmt. remains confident of sustaining this trend going forward. Credit costs further moderated to 1.03% (vs 1.06% in 3QFY24). We build avg. credit cost of 0.93% over FY25/26E. 

Valuation and view: CBK has been able to sustain its RoA of ~1% over several quarters, driven by a) stable NIMs by strategically moving away from older low-yielding corporate book, b) largely stable cost to income ratio, and c) continuous moderation of credit costs. On the back of this, we expect CBK’s rerating to continue going ahead and expect RoA/ROE to reach 1.02%/16.7% by FY26E. We maintain BUY with a revised TP of INR 600 (valuing core bank at 1.0x FY26E BVPS).

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