Buy Canara Bank Ltd for the Target Rs.130 by Emkay Global Financial Services Ltd
Healthy growth and treasury gains drive earnin
Despite lower NII/margins, Canara Bank (CBK) posted a 6% beat on earnings at Rs47.5bn/1.14% RoA, mainly aided by higher treasury gains and PSLC fees (Rs12bn), and partly offset by higher provisions as the bank continues to shoreup PCR. Credit growth outpaced expectations at 13.4% YoY/2% QoQ, while deposit growth was soft at 10% YoY/1% QoQ, leading to LDR expansion to 73%. However, the sharp cut in loan yields and sticky CoF caused an 18bps QoQ dip in NIM to 2.55%. CBK’s headline asset quality continues to improve, with GNPA ratio down by 25bps QoQ to 2.7% on contained slippages, though SMA 2 inched up a bit due to continued stress in one government account – the mgmt is confident of the account’s timely recovery and does not expect it to slip into NPA. We largely uphold our earnings estimate; we expect CBK to deliver healthy RoA of 0.9-1% over FY26-28E. We retain BUY and our TP of Rs130, valuing the SA bank at 0.9x Jun-27E ABV/subs at Rs6/sh. Notably, CBK plans to list its insurance and AMC JV, leading to better value discovery and capital efficiency.
Healthy credit growth, though margins contract due to sticky funding cost
CBK posted healthy credit growth of 13.4% YoY/2% QoQ (owing to strong retail growth and slight pick-up in MSME loans). Due to revised GL norms, the bank expects PSLC outflows to potentially reduce; however, PSLC fees may remain elevated as agri PSLC rates have surged to 3% (from 1.6-1.7%) amid tighter supply. Deposit growth was moderate at 10% YoY/1% QoQ, while CASA ratio declined by 152bps QoQ to 27%; hence the sticky CoF. This, coupled with lower loan yield, led to an 18bps QoQ dip in NIM to 2.55%. The mgmt expects NIM to dip further in Q2FY26 due to a lagged impact of the 50bps rate cut, partly offset by deposit repricing, with improvement likely from H2FY26
Headline asset quality as well as PCR continue to improve
Headline asset quality continues to improve, with GNPA ratio down by 25bps QoQ to 2.7% and NNPA at 0.6%, while slippage ratio was well contained at Rs21.7bn/0.9% of gross loans (lower than our expectation). Specific PCR improved further by 40bps QoQ to 77%, which we believe is positive and should help the bank limit any impact of the ECL norms. While overall SMA book improved to Rs87.5bn/0.8% of gross loans (vs Rs103bn/1% of gross loans in Q4), SMA 2 rose slightly due to stress in one governmentbacked account (~Rs30bn), which it is confident of recovering. The management endeavors to maintain its GNPA/NNPA ratio below 2.5%/0.6%, respectively, in FY26.
We retain BUY on the stock
We largely retain our earnings estimates and expect the bank to deliver healthy RoA of 0.9-1% over FY26-28E. We retain BUY on CBK with unchanged TP to Rs130, valuing the standalone bank at 0.9x Jun-27E ABV and subs at Rs6/sh. Notably, the bank plans to list its insurance and AMC JV which would lead to better value discovery and capital efficiency. Key risks: Lower than expected growth/margins and ECL implementation.
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