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Stable margins, healthy RoA; retain BUY

Despite higher opex/LLP, Canara Bank (CBK) reported nearly inline PAT at Rs37.6bn/RoA @ 1%. This was mainly driven by steady & healthy margins at 3% and fees/treasury gains. Going forward, the bank expects credit growth to remain moderate @10% (with a slight upward bias), with clear focus on managing margins at 2.9-3%, hence also the overall profitability. Bank has indicated that it has ~Rs1,000bn (~10% of gross advances) exposure towards project finance, and our back-of-the-envelope calculation suggests a maximum ~7-8bps impact on loans in FY25E (without adjusting any exposure with Govt guarantee), per the RBI’s recent draft IRACP guidelines. Factoring-in healthy growth in fees and the lower opex, we revise FY25-26E earnings by 6-7% and expect the bank to deliver a healthy 1-1.1% RoA/17-21% RoE over FY25-27E. Given our general positive stance for PSBs and in particular CBK’s sustained strong performance, we retain BUY, lifting our TP to Rs650/sh (from Rs550), rolling forward the standalone bank at 1.1x FY26E ABV and subs at Rs30/sh

Slower growth, but steady margins

Canara Bank continued to report relatively moderate credit growth at 12% YoY/1% QoQ, whereas deposits grew relatively faster at 11%YoY/4% QoQ leading to moderation in LDR to 71%. Nevertheless, higher yields on account of increased share of retail loans coupled with a 66bps QoQ improvement in CASA ratio to 30% (and hence the contained cost) led to a 3bps QoQ uptick in NIMs to 3.1%. Going forward, the bank expects credit growth to remain moderate @10% (with a slight upward bias) and margins at 2.9-3%, on the back of better cost management and portfolio mix, incl. the high-yielding RAM segment.

Asset quality continues to improve

Gross slippages were slightly higher seasonally at Rs34bn/1.6% of loans which, coupled with higher write-offs, led to a further 16bps QoQ reduction in GNPA ratio to 4.2%. The bank’s restructured loan book too declined, to 1.3% of loans (vs 1.6% in Q3). The SMA 1&2 book stayed largely stable at 0.7% of loans. Bank expects NPAs to keep trending down led by contained slippages, aggressive write-off strategy, and persistent recoveries at the current run-rate; this, coupled with reasonable specific PCR at 71%, should limit LLP, thereby supporting overall profitability. Bank has indicated that it has ~Rs1,000bn (~10% of gross advances) exposure to project finance, and our back of the envelope calculation suggests a maximum impact of ~7-8bps on loans in FY25E (without adjusting any exposure with Govt guarantee), per the RBI’s recent draft IRACP guidelines. Moreover, the bank has created AIF provision of Rs0.12bn during the quarter.

We retain BUY

Factoring-in the healthy growth in fees and lower opex, we revise FY25-26E earnings by 6-7% and expect the bank to deliver a healthy 1-1.1% RoA/17-21% RoE over FY25-27E. Given our general positive stance for PSBs and in particular CBK’s sustained strong performance, we retain BUY, lifting our TP to Rs650/sh (from Rs550), rolling forward the standalone bank at 1.1x FY26E ABV and subs at Rs30/sh. Key Risks: Slower growth due to macroeconomic challenges and higher-than-expected increase in provisioning due to new IRACP guidelines and the ensuing ECL impact.

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