Canara Bank - Asset Quality Remains a Concern - ENAM DIRECT

Canara Bank's Q2 performance was below expectations due to muted business growth and higher slippages. However, management indicated lower NPAs in subsequent quarters due to likely upgradation of certain accounts and lower fresh slippages. While Canara Bank may achieve this, we remain cautious on bank's strategy as a new CMD is likely to be appointed soon. Hence we have not factored in any improvement in asset quality in our FY13 estimates. We revise downwards our FY13 and FY14 earnings estimates by 14% and 7% to factor in higher slippages and lower business growth.

Downgrade to HOLD: Our revised TP of Rs 425 (0.8x FY14E ABV) vs. Rs 433 earlier implies limited upside from CMP of Rs 419. The stock trades at 0.9x FY13E ABV of Rs 457 and 0.8x FY14E ABV of Rs 528.

Asset quality: GNPA ratio rose 60 bps to 2.6% due to higher slippages of Rs 19 bn (slippage ratio of 3.5% vs. 2.8% in Q1), mainly few large accounts including Deccan Chronicle (Rs 3.3 bn; ~70% already provided). Management indicated some of these accounts may be upgraded in next few months and fresh slippages would also trend downward.

Restructured book rose to 6.9% of gross loans (from 6.2% in Jun-12) due to fresh restructuring of Rs 6.1 bn. This included restructuring of Bharti Shipyard of Rs 2.2 bn. The bank doesn't have a significant restructuring pipeline.

Business growth was muted as loan book declined 4% QoQ (down 1% YoY) due to sequential de-growth in corporate and retail segments. Management maintained its guidance for below industry loan growth of 13-15% in FY13.

Source : Equity Bulls

Keywords