Visit http://indiaer.blogspot.com/ for complete details CANARA BANK 2QFY11: Very strong quarter; Margin expansion of 15bp QoQ; Buy with TP of Rs850
Canara Bank (CBK IN, Mkt Cap US$6b, CMP Rs657, Buy) 2QFY11 NII grew 52% YoY to Rs20b (vs est of Rs17.8b) whereas PAT grew 11% YoY to Rs10.1b (10% higher than est of Rs9.2b). Profitability is driven by strong core operating performance with margin expansion (15bp QoQ and 50bp YoY) and loan growth of 20% YoY. Improvement in NIMs and lower than expected provisioning resulted in higher than estimated earnings. Key Highlights:
- Loans increased 20% YoY (1.3% QoQ) while deposits increased 22% YoY (4.3% QoQ).
- NIMs for 1HFY11 were 3.16% vs 2.66% in 1HFY10 (3.01% in 1QFY11) – a positive surprise; Improvement in margins is driven by stable cost of deposits on a QoQ.
- Gross NPAs increased just 3% QoQ (a positive surprise) to Rs26.4b and Net NPAs increased by 8% QoQ to Rs18.6b. PCR including technical write-off stood at 77.1% vs 78% at the end of 1QFY11
- Stable asset quality resulted in lower provisioning expenses of Rs1.6b vs Rs2.2b in 1QFY11 – driver for higher profitability
- Reported operating profits were flat YoY; core operating profits grew 48% YoY and 15% QoQ led by strong NII growth. Fee income growth was muted at ~10% YoY; Operating expenses grew 38% YoY led by 57% increase in employee cost. We wait for clarification whether pension cost is accounted in the quarterly numbers.
- On the back of healthy NIMs and stable asset quality, we are revising our earning estimates for Canara Bank by 8% for FY11E and 9% for FY12E. We expect ROAs and ROEs to be relatively high at ~1.3% and ~26% for FY11-12E respectively. The stock trades at 1.4x FY12E BV and 6.1x FY12E EPS. Sustainability of core operating profits will drive re- rating. BUY with revised target price of Rs850 (1.8x FY12 BV), an upside of 30%.
Loan growth in line with industry trend; CD ratio declines to 70.7%
- Loans grew 20% YoY (1.3% QoQ) while deposits increased 22% YoY (4.3% QoQ). Key drivers for the loans were Infrastructure loans (up 63% YoY and down 2% QoQ), retail loans (up 26% YoY) and SME loans (up 21% YoY). For FY11, management targets for ~25% loan growth (thus, for 2HFY11 mgmt is targeting 19% loan growth) while we are modeling for 22% growth.
- CASA deposits growth moderated to ~23% (vs ~29% in 1QFY11 on a lower base), however CASA ratio remain steady at ~29%.
- Higher sequential growth in deposits resulted in CD ratio declining 210bp sequentially to 70.7%.
Valuation and view
- The quality of earnings has improved with margins reaching 3.16% levels and asset quality being fairly stable. Mgmt remains confident of maintaining margins at 3.1-3.2% despite rising cost of funds. Positive surprises on the asset quality will provide re-rating.
- We have upgraded our earning estimates by 8-9% for FY11-12 to factor in healthy NII growth and lower provisioning expenses.
- We expect CBK to report EPS of Rs95 in FY11 and Rs109 in FY12. BV will be Rs383 and Rs472 in FY11 and FY12 respectively. ROAs and ROEs would be high at ~1.3% and 26% respectively for FY11-12E
- The stock trades at 1.4x FY12E BV and 6.1x FY12E EPS. Buy with a revised target price of Rs850 (1.8x of FY12 BV).
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