Canara Bank 2QFY11 – Raising estimates, upgrade to Buy:: Anand Rathi

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Canara Bank
2QFY11 – Raising estimates, target price; upgrade to Buy



 Raising target price and estimates. We upgrade Canara Bank to
Buy from Hold, and raise FY11e/FY12e EPS by 45.8%/44.1%,
due to its healthy 2QFY11 performance. We value the stock at
1.9x FY12e ABV (earlier 1.3x) owing to a better RoE, and raise
our target price to `863 from `537.
 Net profit up 10.7%. Robust net interest income growth (52.5%
yoy) and lower provisions (down 48.8% yoy) aided net profit
growth. Trading gains were `15.8m, plunging 96.4% yoy.
 Business growth steady, NIM expands. Credit and deposits
growth yoy (20.2% and 21.5% respectively) was complemented by
50bp yoy NIM expansion to 3.16%. As loan growth revives,
credit-to-deposits is likely to improve, further enhancing NIMs.
We raise our FY11e and FY12e NII by 20.3% and 33%
respectively and estimate FY10-13 NIM at ~3%.
 Improving coverage, declining credit costs. Gross NPAs rose
3% qoq, with NPA coverage (including technical write-offs) at
77.1%. Credit costs declined 18% yoy to `2bn (0.5% of loans) and
are unlikely to be a huge risk to earnings growth ahead. We
estimate credit costs at 45bp in FY11 and 44bp in FY12.
 RoE to improve, hence re-rating likely. We expect earnings
CAGR of 27.1% and RoE of ~25% over FY10-13e. As the bank’s
NIM and asset quality improves to its peer average, we expect it to
trade at a higher PBV than in the past.
 Valuation and risks. At our target price, Canara would trade at
FY12e PBV of 1.6x and FY13e BV of 1.3x. Risk: Higher credit
costs, due to lower-than-expected NPA recoveries.