Buy Canara Bank Ltd for the Target Rs.160 by Motilal Oswal Financial Services Ltd
Healthy performance; margin improves 3bp QoQ Lower provisioning and reduced opex drive earnings beat
* Canara Bank (CBK) posted a 2QFY27 standalone PAT of INR51.7b (up 8% YoY/7% QoQ; 8% beat on MOFSLe), fueled by lower-than-expected provisions and opex.
* NII grew 20% YoY/8% QoQ to INR110.0b (3% higher than MOFSLe). CBK’s NIM improved 3bp QoQ to 2.55% (in line). The bank maintained its NIM guidance of 2.5-2.6% for FY27.
* The bank’s loan book grew 20% YoY/7% QoQ to INR13.6t. Deposits grew 13% YoY/ 5% QoQ to INR16.97t.
* Slippages stood at INR19b (INR18b in 1QFY27). GNPA/NNPA ratios improved 24bp/6bp QoQ to 1.33%/ 0.30%. PCR rose to 77.9% (up 71bp QoQ). The impact of the ECL transition is likely to be in the range of INR120- 150b (vs. INR100-120b earlier) and is likely to affect CRAR by ~1.0-1.2%.
* We tweak our estimates for FY27E/28E and expect CBK to deliver an FY27 RoA/RoE of 1.06%/18.9%. Reiterate BUY with a TP of INR160 (based on 1.1x Mar’28E ABV+ INR13 for subsidiaries).
Business growth steady; asset quality ratios improve
* CBK’s 2QFY27 PAT grew 8% YoY/7% QoQ to INR51.7b (8% above MOFSLe), aided by lower-than-expected provisioning and opex.
* NII grew 20% YoY/8% QoQ to INR110.0b (~3% beat). Its margin expanded 3bp QoQ to 2.55% (in line). CBK retained its FY27 NIM guidance at 2.5-2.6%.
* Other income declined 18% YoY/ 14% QoQ to INR57.7b (3% lower than MOFSLe) with lower PSLC and treasury income. Total revenue thus rose 4% YoY to INR167.8b (in line).
* Operating expenses increased 5% YoY (down 3% QoQ) to INR80.2b (4% lower than MOFSLe). C/I ratio declined to 47.8% (vs. 49.0% in 1QFY27). PPoP thus rose 2% YoY/1% QoQ to INR87.4b (5% beat).
* The loan book grew 20.4% YoY/6.5% QoQ, led by robust growth in the retail (21% YoY/6.2% QoQ) and Agri segments (14.3% YoY/10.2% QoQ). The gold loan book stood at INR2.8t, of which the agricultural gold loan book accounted for INR1.7t.
* Deposits grew 13.1% YoY/5.3% QoQ to INR16.97t. CASA deposits grew 4.9% YoY/2.6% QoQ. CASA ratio stood at 29.0% (vs 29.7% in 1QFY27), while the CD ratio increased to 80.2% (vs. 79.3% in 1QFY27).
* Provisions came in at INR17.8b (13% below MOFSLe), down 14% QoQ and 24% YoY. Slippages increased marginally to INR19b (INR18b in 1QFY27), even as asset quality ratios improved across segments. GNPA/NNPA ratios improved 24bp/6bp QoQ to 1.33%/0.30%. PCR stood at 77.9%.
* Reported credit costs dipped to 0.47% from 0.49% in 1QFY27. SMA book (INR50m and above) declined to 0.51% from 0.58% in 1QFY27.
Valuation and view: Reiterate BUY with a TP of INR160
CBK reported a steady quarter with an uptick in margins and lower provisions and opex while asset quality continued to improve. CBK’s NIM is expected to be rangebound at 2.5-2.6% for FY27 aided by rate hikes. Loan growth was healthy and broadbased with RAM segments leading the overall growth. Deposit growth lagged credit growth, while CBK remains focused on improving the granularity of deposits. CBK maintains its loan growth guidance of 11-12%. The bank’s asset quality improved, with lower NPAs across asset classes. CBK will need to make additional provisions of INR120-150b for the ECL transition, with an estimated impact of 1.0-1.2% on CRAR. The RoA guidance stands at 1%+ for FY27. We marginally tweak our estimates for FY27E/28E and expect CBK to deliver FY27E RoA/RoE of 1.06%/18.9%. Reiterate BUY with a TP of INR160 (based on 1.1x Mar’28E ABV+ INR13 for subsidiaries).
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