Visit http://indiaer.blogspot.com/ for complete details Upgrade to Buy; Raise PO to Rs800, 23% upside potential
We upgrade Canara Bank to a Buy (from U/p) and raise PO to Rs800 after strong
2QFY11 earnings and NPL formation being much lower than expected. While the
stock has O/p market by 10/20% over 3/6 months, it is still at 15-20% discount to
peer banks with similar RoE’s. We est. NPL formation at Rs3bn, almost 50%
lower than our quarterly run rate (Rs6-7bn). The worst appears behind us in
regard to asset quality, our key concern. Further, earnings to grow by 33/20% in
FY11/12 (v/s <10%) owing to sharply lower credit costs and better margins. RoE
to rise to +23%, amongst highest in sector. Hence, using Gordon model as basis,
stock can trade up to at least 1.9x FY12 adj. BV (target PE of <9x).
2QFY11: Earnings 5% ahead, but NPL run rate 50% lower
Canara Bank’s 2QFY11 net profit of Rs10.1bn was up 11% yoy; and 5% ahead.
But the quality of earnings was much better. Topline grew by +52% yoy (14%
ahead) driven by expanding margins (up 50bps yoy and 15bps qoq) to 3.2% and
20% loan growth. Headline NPLs did rise by 3% (gross) and 8% (net) but remain
under check, with prov. cover at +77%. NPL formation is est. at Rs3bn. Fee
growth, at ~10% yoy was the main disappointment.
Raise earnings by 33/29% for FY11/12; Growth at +32/20%
We raise earnings by 33/29% for FY11/12 to capture sharply lower credit costs;
higher margins (with CASA rising to +30%) and better volumes from infra based
lending. Earnings to grow by +32% and 20%. Also well hedged to rising bond
yields with +80% of G-secs in HTM and AFS duration of 2 years.
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