Canara Bank - Beneficiary of easing wholesale environment - Antique

Results highlights

Canara Bank (CBK) reported 4QFY13 earnings at INR7.2bn, in line with consensus estimates of INR7.3bn and lower than our estimates of INR 9.3bn primarily on back of higher provisioning expenses. While core earnings progression was stable, with resilient margins, improvement in asset quality ratios on back of lower slippages and strong recoveries; Increase in stock of restructured pool was the key negative that emerged from the result.

Marginal uptick in loan growth; Margins to remain at 2.5-2.6% for FY14E

After consolidating its position over the last few quarters, b/s growth for the bank finally picked up with advances growth at 11%QoQ and deposits growth at 9%QoQ. Growth in advance was driven by agriculture, sme and msme segment. Further in line with government expectations, the bank continued to successfully reduce its dependence on wholesale advances (bulk and certificate deposit), which now constitutes around 20% of total deposits. Going forward, Management is guiding loan growth at 24% for FY14E with focus on retail & msme segment. However, going forward, management is guiding margins to expand by 15-20bps, as the bank's strategy on balance sheet de-bulking and easing wholesale rate environment would start yielding results in FY14e.

Initial signs of asset quality improving, however overhang on restructuring remains

Asset quality ratios for the bank improved with GNPA ratio declining by 20bps to 2.57% and NNPA ratio declining by 17bps to 2.18%. Slippages for the bank came in at INR10bn (delinquency ratio at 1.8% vs. 2.4% in 3QFY13) as one of the chunky account amounting to INR 5.5bn slipped into NPA. Credit cost for the bank came in at 60bps compared to 109bps in previous quarter. Reported coverage ratios for the bank remained stable at 61%.Incremental restructuring in the current quarter at INR23bn taking total restructured book to 7.5% of advances. Going forward, management is guiding GNPA ratios to contain below 2% levels and NNPA below 1% levels for FY14e.

Valuation and outlook

We believe that Canara Bank is probably the best positioned amongst the large PSU banks on the easing rates cycles given that the bank has multiple levers. Hence earnings for the bank are likely to growth at 30% CAGR over FY13-15e.Therefore, we continue to maintain our BUY recommendation with a target price of INR488/share on the bank given inexpensive valuations, and roll over our earnings estimates to FY15e.

Source : Equity Bulls

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