Canara Bank - Weak growth and deteriorating asset quality drags profitability - Karvy

In Q1FY13, Canara Bank's performance came in below our expectations with PAT growing at 6.8% YoY (down 6.5% QoQ) to Rs7.75 bn, owing to weak growth in advances at 4.9% YoY (down 3% QoQ). NIMs declined 10 bps QoQ to 2.4%, Asset quality continued to deteriorate owing to higher slippages and restructuring of loans. The bank reported treasury profit of Rs988 mn against a loss of Rs 770 mn.

- Asset Quality disappoints: Canara Bank's asset quality continued to deteriorate owing to slippages amounting to Rs15 bn and restructuring of loans worth Rs60.1 bn (including SEB loans amounting to Rs55 bn). Gross NPA stood at 1.98% and Net NPA at 1.66% higher from 1.76% and 1.46% respectively in Q4FY12. Provision coverage ratio stood at 66.5%.

- Lackluster loan Growth: Advances grew at 4.9% YoY (down 3% QoQ) owing to weak economic environment. Deposits grew at a better pace of 11.5% YoY. Consequently, C-D ratio declined 367 bps to 67.4% sequentially. CASA has been on a declining trend with decline of 207 bps YoY and 191 bps sequentially to 23.3%.

- Expansion in NIMs: NIMs declined 10 bps sequentially and 2 bps from last year to 2.4% reflecting weak credit growth and declining C-D ratio. Management has guided for improvement in NIMs which would take place by improving C-D ratio and by shedding higher cost bulk deposits during the course of the year.

Outlook & Valuation

At the CMP the stock is trading at 4.7x and 3.8x FY13E and FY14E earnings, and at 0.8x and 0.7x P/ABV FY13E and FY14E respectively. We have reduced our estimates by 5% and 3% for FY13E and FY14E respectively after factoring weaker credit growth and concerns pertaining to asset quality. Consequently, we have reduced our price target by 6% to Rs434 valuing the stock at 0.76x FY14E Adj. BV and continue to maintain HOLD rating on the stock.

Risks: Asset quality could have bottomed.

Source : Equity Bulls

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