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Canara Bank -Risk-return attractive; Buy; Switch from BOB
„Cut PO, but risk-return remains attractive, switch from BOB
We cut our PO to Rs760 to capture the rising macro headwinds (assuming higher
CoE). We believe the stock trading at 1.7x FY11 book (1.3x FY12 book) can trade
at similar levels one-year out owing to attractive risk-return (RoEs at +24%). We
recommend a switch from BOB (Rs855.25, C-2-7, Neutral) to Canara Bk, as both
have similar RoEs, but BOB trades at a premium of +18-20% to Canara Bk.
3QFY11: Earnings 5% ahead on topline and credit costs
Canara Bank’s 3QFY11 net profit of Rs11bn was up 5% yoy; and 5% ahead on
topline and lower credit costs. Topline grew by +43% yoy (2% ahead) driven by
expanding margins (up 50bps yoy and 5bps qoq) to 3.2% and 29% loan growth
(driven by corporate). Fees disappointed (down 6% yoy). The bank estimated
pension charge at +Rs22bn (5 years) and has provisioned Rs1.1bn in 3Q
(Rs3.4bn in 9M) and also provisioned Rs2bn in gratuity in 3Q (Rs3.2bn in 9M).
Asset quality looks manageable; well hedged to bond yields
Headline gross NPLs rose by 4% (at 1.4%) and net by 7% (at 1.0%), but remain
under check, with prov. cover at +75%. NPL formation at ~Rs5bn in 3Q.
Restructured book stands at 4.6% of loans (slippages to NPLs at <8%). The bank
looks well hedged to rising bond yields (~80% in HTM; AFS duration of ~4 years).
Raise earnings by 2% each for FY11/12; Growth at +35/20%
While headline earnings surprised by 5%, we raise our EPS estimates by only 2%
each for FY11/12 to capture a possible margin pressure as rates rise and share of
low-cost deposits low at 29% and also capturing higher tax rates (estimated at
24% in FY12 vs. 19% now). Earnings est. to grow by +35/20% in FY11/12.
Price objective basis & risk
Bank of Baroda (BKBAF)
We set our PO at Rs915 for Bank of Baroda. While, BOB has shown a marked
improvement in its quality of earnings over the quarters, we believe that re-rating
beyond 1.7x FY12 book (trades at 1.6x FY12 book) might be limited, as we
assume higher CoE owing to rising macro headwinds. Our PO is based on
Gordon theory multiples, wherein we assume RoE of +23.5pct and CoE at 14%,
implying theoritical multiple of 1.7x (target multiple). Hence, our Neutral rating and
our PO of Rs915. A surge in NPLs, and the inability to manage margin pressure
as it expands its overseas loans (24pct of loans) are risks to our PO.
Canara Bank (CNRKF)
We set our PO at Rs760. We believe the stock trading at 1.7x FY11 book (1.3x
FY12 book) can trade at similar levels one-year out owing to attractive risk-return
(RoEs at +24%). Hence, using Gordon model as basis, we estimate the stock
could trade up to at least 1.7x FY12E adj. BV (RoE of 24% and CoE of 14%).
Downside risks are a sharp rise in NPLs and an inability to manage growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Canara Bank -Risk-return attractive; Buy; Switch from BOB
„Cut PO, but risk-return remains attractive, switch from BOB
We cut our PO to Rs760 to capture the rising macro headwinds (assuming higher
CoE). We believe the stock trading at 1.7x FY11 book (1.3x FY12 book) can trade
at similar levels one-year out owing to attractive risk-return (RoEs at +24%). We
recommend a switch from BOB (Rs855.25, C-2-7, Neutral) to Canara Bk, as both
have similar RoEs, but BOB trades at a premium of +18-20% to Canara Bk.
3QFY11: Earnings 5% ahead on topline and credit costs
Canara Bank’s 3QFY11 net profit of Rs11bn was up 5% yoy; and 5% ahead on
topline and lower credit costs. Topline grew by +43% yoy (2% ahead) driven by
expanding margins (up 50bps yoy and 5bps qoq) to 3.2% and 29% loan growth
(driven by corporate). Fees disappointed (down 6% yoy). The bank estimated
pension charge at +Rs22bn (5 years) and has provisioned Rs1.1bn in 3Q
(Rs3.4bn in 9M) and also provisioned Rs2bn in gratuity in 3Q (Rs3.2bn in 9M).
Asset quality looks manageable; well hedged to bond yields
Headline gross NPLs rose by 4% (at 1.4%) and net by 7% (at 1.0%), but remain
under check, with prov. cover at +75%. NPL formation at ~Rs5bn in 3Q.
Restructured book stands at 4.6% of loans (slippages to NPLs at <8%). The bank
looks well hedged to rising bond yields (~80% in HTM; AFS duration of ~4 years).
Raise earnings by 2% each for FY11/12; Growth at +35/20%
While headline earnings surprised by 5%, we raise our EPS estimates by only 2%
each for FY11/12 to capture a possible margin pressure as rates rise and share of
low-cost deposits low at 29% and also capturing higher tax rates (estimated at
24% in FY12 vs. 19% now). Earnings est. to grow by +35/20% in FY11/12.
Price objective basis & risk
Bank of Baroda (BKBAF)
We set our PO at Rs915 for Bank of Baroda. While, BOB has shown a marked
improvement in its quality of earnings over the quarters, we believe that re-rating
beyond 1.7x FY12 book (trades at 1.6x FY12 book) might be limited, as we
assume higher CoE owing to rising macro headwinds. Our PO is based on
Gordon theory multiples, wherein we assume RoE of +23.5pct and CoE at 14%,
implying theoritical multiple of 1.7x (target multiple). Hence, our Neutral rating and
our PO of Rs915. A surge in NPLs, and the inability to manage margin pressure
as it expands its overseas loans (24pct of loans) are risks to our PO.
Canara Bank (CNRKF)
We set our PO at Rs760. We believe the stock trading at 1.7x FY11 book (1.3x
FY12 book) can trade at similar levels one-year out owing to attractive risk-return
(RoEs at +24%). Hence, using Gordon model as basis, we estimate the stock
could trade up to at least 1.7x FY12E adj. BV (RoE of 24% and CoE of 14%).
Downside risks are a sharp rise in NPLs and an inability to manage growth.
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