Upgrade to HOLD Canara Bank - Business Growth to Gain Momentum, Pressure on Asset Quality to Ease - Karvy

Canara Bank is currently trading at 8% discount to mean valuation, while the stock has underperformed the Bankex by 19% over last one year reflecting weak balance sheet growth and concerns over asset quality.

Business Growth to Gain Momentum from H2FY13: Canara Bank's business growth has been under severe pressure since FY12. The Bank's credit has slowed down with 600 bps growth below system. Its C-D ratio also has declined by 700 bps since FY12. We expect business growth to gain momentum from H2FY13 onwards on the back of lower base. However, the overall growth in Bank's loan book will remain muted for FY13 at 11%.

NIMs - Set to Improve The Bank's NIM in H1FY13 declined by 15bps as against FY12, partially owing to increase in cost of funds and decline in C-D ratio. We expect the Bank's margin would improve in H2FY13 driven by rise in CD ratio and reduction in cost of deposits.

Pressure on Asset Quality - Expected to Ease: Canara Bank's NPAs have shown deterioration in H1FY12. Though the Bank's slippage ratio has increased to 3% in H1FY13, its asset quality remains better than some of its peers. The Bank's restructured loan book stood at 7.9% of advances, and we expect its asset quality to improve from now onwards.

Outlook & Valuation

At the CMP, the stock trades at 5.5x & 4.7x FY14E & FY15E earnings, and at 1.0x & 0.8x P/ABV FY14E & FY15E, respectively. Based on 20% discount to its historical mean valuation implying 0.9x P/ABV FY15E, we have upgraded our recommendation on Canara Bank to "HOLD" from "SELL" with upwardly revised target price of Rs. 570 per share (from Rs. 410 earlier).

Source : Equity Bulls

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