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Earnings in line; asset quality improves further

Guides for RoA of ~1% in FY25

* Canara Bank (CBK) reported 4QFY24 standalone PAT of INR37.6b (up 18% YoY, in line), driven by higher other income. NII grew 11.2% YoY (in line), while margins improved 4bp QoQ to 3.07%.

* Other income grew 9.3% YoY to INR52.2b (up 21.5% QoQ, 14% beat). PPoP thus grew 2% YoY (5% beat).

* On the business front, loan book grew 12.2% YoY (1.2% QoQ), while deposits grew 11.3% YoY (3.9% QoQ) to INR13.1t. The CASA ratio, thus, expanded 64bp QoQ to 32.3%.

* GNPA/NNPA ratios improved 16bp/5bp QoQ to 4.23%/1.27%,. Fresh slippages increased to INR30.8b vs. INR26.9b in 3QFY24. RoA/RoE stood at 1.01%/22.1% as against the guidance of 1%/19.5% for FY24. ? We broadly maintain our estimates and expect CBK to deliver FY26 RoA/RoE of 1.1%/18.4%. Reiterate BUY with a TP of INR650 (1x FY26E ABV).

Revenue growth steady; margins improve 4bp QoQ

* CBK reported 4QFY24 standalone PAT of INR37.6b (up 18% YoY, in line), driven by higher other income. NII grew 11.2% YoY (in line), while margins improved 4bp QoQ to 3.07%. FY24 standalone PAT stood at INR145.5b.

* Other income grew 9.3% YoY to INR52.2b (14% beat). Total revenue, thus, grew 10.5% YoY (6% beat). Provisions stood at INR24.8b (up 31% QoQ, 11% higher than MOFSLe).

* Operating expenses grew 20.7% YoY to INR74.1b (7.3% QoQ growth, 7% higher than MOFSLe). PPoP, thus, grew 2% YoY (5% beat). Treasury income stood at INR8.65b in 4QFY24 vs. INR4.95b in 3QFY24

* Loan book grew 12.2% YoY (up 1.2% QoQ), led by Agri segment, which grew 4.4% QoQ (up 18.7% YoY). Deposits grew 11.3% YoY (up 3.9% QoQ) and CASA deposits grew 6.2% QoQ (up 7.1% YoY), leading to an expansion in the CASA ratio by 64bp QoQ to 32.3%. Term deposits increased 18.2% YoY.

* GNPA/NNPA ratios improved by 16bp/5bp QoQ to 4.23%/1.27%. PCR stood at 71%. Fresh slippages stood at INR30.8b vs. INR26.9b in 3QFY24. Credit cost stood at 0.96% as against the guidance of 1.2% for FY24.

* Total SMA book moderated to 0.69% in 4QFY24 from 0.8% in 3QFY24.

Highlights from the management commentary

* CBK guides NIMs to be at ~2.95-3.0% in FY25.

* Under the bipartite settlement, the bank has allocated an additional INR3.5b for pension benefits. Staff cost is expected to stabilize at INR41b in 1QFY25.

* The bank added INR14b (included both AFS + HTM) to the reserves. The HTM portfolio is also giving ample scope for future profitability as the yields are coming down. CET-1, thus, improved by 21bp.

* Slippages break up: INR10.8b in Agri, INR12b in MSME, INR4b in retail, and INR4b from Mid corp.

Valuation and view

CBK reported healthy but in-line earnings in 4QFY24, led by higher other income, which was partially offset by higher-than-expected provisions. Healthy NII growth led to a 4bp QoQ margin expansion. However, the management expects NIMs at ~2.9-3% in FY25. Loan growth was led by the retail segment. Deposit growth has gained pace, driven by CASA deposits, and the outlook remains encouraging. Fresh slippages increased sequentially; however, overall asset quality ratios improved. We broadly maintain our earnings estimates and expect CBK to deliver FY26 RoA/RoE of 1.1%/18.4%. We reiterate our BUY rating with a TP of INR650 (1x FY26E ABV).

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