Buy Canara Bank 3QFY11 – Healthy NIM, NPA coverage; Anand Rathi

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Canara Bank
3QFY11 – Healthy NIM, NPA coverage; Buy
Canara Bank’s net profit grew 5% yoy, led by robust net interest
income growth (43.4% yoy) and lower provisions (down 6.1%
yoy). As the bank’s NIM and asset quality improves against its
peer average, we expect the stock to trade at a higher PBV than
in the past. We maintain our Buy.
 Business growth healthy, NIM expands. Credit and deposit
growth yoy (28.8% and 25.4% respectively) was complemented by
50-bp yoy NIM expansion to 3.21%. Canara’s credit-to-deposits in
3QFY11 improved 190bps yoy to 72.1%. CASA grew 27.7% yoy,
with the share of domestic CASA stable qoq, at 30.5%.
 Improving coverage, declining credit costs. Gross NPAs rose
4.4% qoq, but NPA coverage (incl. technical write-offs) is high, at
75.9%. Credit costs slid 18% yoy to `1.3bn (0.37% of loans) and
are unlikely to be a huge risk to earnings growth. We estimate
credit costs at 45bps in FY11 and 44bps in FY12.
 Fees and productivity decline. Core fees slipped 6.3% yoy, with
treasury gains falling 90.2% yoy. Productivity declined, with core
cost-income rising 330bps yoy (flat qoq), to 43.5%.
 RoE to improve, hence re-rating likely. We expect a 27.1%
CAGR in earnings and ~25% in RoE over FY10-13. As the
bank’s NIM and asset quality improves to its peer average, we
expect the stock 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.