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Strong guidance on loan growth but execution is vital

Earnings in line; Sequential expansion in NIM but GS3 up ~15bp QoQ

CANF’s 3QFY24 PAT grew ~32% YoY to ~INR2b (in line). NII grew 31% YoY to ~INR3.3b (in line). 9MFY24 PAT rose 19% YoY to ~INR5.4b.

Opex grew ~13% YoY and declined ~6% QoQ to INR494m because of the absence of annual incentives and one-off process enhancement expenses during the quarter. PPoP grew 35% YoY to INR2.9b (in line).

Repricing of the last tranche of loans resulted in a ~10bp QoQ improvement in yields. With CoF broadly stable QoQ, NIM expanded ~5bp to ~3.7%. We model NIM of 3.8%/3.7%/3.6% in FY24/FY25/FY26.

The management expects an ambitious CAGR of ~20% in loans over the next four years, aided by a) lead originations from digital channels, b) branch expansions and corresponding improvements in productivity, and c) transition to higher ticket-size home loans.

We model an AUM/PAT CAGR of 15%/16% over FY23-26E with RoA/RoE of 2.1%/~18% in FY26. CANF, in our view, is a robust franchise with strong moats on the liability side. However, we await a recovery in loan growth and early signs of execution on loan growth guidance before turning constructive on the stock. At 1.6x Mar’26E P/BV, we believe valuations largely price in the positive factors. Maintain Neutral with a TP of INR815 (1.8x Mar’26E BV).

Disbursements impacted by process changes; book run-off stable QoQ

3QFY24 disbursements declined 23% YoY to ~INR18.8b. Process changes (including centralization of disbursements and reconciliations) impacted Oct’23 disbursements. Dec’23 disbursements reached a run rate of ~INR7b.

Advances grew ~13% YoY and ~2% QoQ to ~INR341b. Annualized run-off in advances stood at ~14% (flat QoQ), which was lower than ~16% YoY.

Margin improved QoQ; share of CP declined

NIM (reported) improved ~5bp QoQ to 3.7%. Reported spreads also rose ~5bp QoQ to 2.7%, due to a ~10bp QoQ rise in yields. The last tranche of CANF’s back-book was repriced in 3QFY24.

Bank borrowings in the mix rose to 60% (vs. ~57% in 2Q), while NHB borrowings remained stable at ~19%. The proportion of CPs declined to 5% (vs. ~7% in 2Q).

Asset quality deterioration driven by slippages from restructured pool

Asset quality deteriorated as GS3/NS3 rose ~15bp/5bp QoQ to ~0.9%/0.5%. PCR on S3 loans rose ~170bp QoQ to ~46%. Entire restructured pool exited restructuring in Nov’23 and there were even closures of restructured loans, which led to a decline in provisions on the restructured pool.

The management expects GS3 to decline by INR200-300m in 4QFY24, resulting in GS3 of 0.75-0.8% by Mar’24.

Sourcing higher-ticket home loans; reduction in loans sourced from DSA

The average ticket size (ATS) of incremental housing loans rose to INR2.5m (from INR2.2m in 2Q and 1Q).

DSA channel in the sourcing mix declined to 79% (2Q: ~82% and 1Q: ~85%).

Valuation and view

CANF has successfully demonstrated its ability to maintain its pristine asset quality for many years. Credit costs (including management overlay) could be elevated in FY24E at ~35bp, we expect it moderate to ~20bp in FY25/FY26. We estimate a 16% CAGR in each of NII/PPOP/PAT over FY23-26 and RoA of 2.1% and RoE of ~18% in FY26.

Maintain Neutral with a TP of INR815 (based on 1.8x Mar’26E BVPS).

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