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Canara Bank :F3Q11: Good Numbers
What's Changed
Price Target Rs920 to Rs800
EPS F11e/12e/13e +15%/-14%/-14%
Earnings surprise was driven mainly by lower than
expected credit costs: Canara Bank reported F3Q11
profits of Rs11.1 bn. The bank benefited from a lower
effective tax rate this quarter – however, at the PBT level,
profits were up 8% QoQ / 4% YoY and were 20% ahead
of our estimates.
Results highlights: a) Volume growth was strong.
Loans grew by 8% QoQ and 29% YoY. Deposits grew
by 6% QoQ and 25% YoY. CASA moved 10 bps higher
QoQ to 29%. b) Computed NIM was flat QoQ to at
~3.31%. NII grew by 6% QoQ / 43% YoY. c) Core
non-interest income progression was weak at +1% QoQ
/ +15% YoY. d) Canara Bank has made provisions
related to second pension option related liability in
F9M11 and indicated that it would amortize the liability
over five years, pending RBI guidelines. This implies a
total liability of Rs22.5 bn. e) New NPL slippages and
credit costs were lower at Rs6.2bn (1.4% of loans,
annualized) and Rs1.3 bn (0.28%). However, the
negative was that the NPL coverage (including tech
writeoffs) ratio moved lower by 120 bps QoQ to 75.9%.
Maintain OW: Core PPOP growth at Canara Bank was
robust at 5% QoQ / 44% YoY in QE Dec-10, driven by
robust revenue growth. Asset quality trends have been
tracking better than expectations. We believe valuations
are attractive at 6.5x F2012e P/E and 1.2x F2012e BV.
Reducing price target to reflect higher bear case
probability, estimate changes: We are reducing our
price target from Rs920 to Rs800. We now apply higher
probability to our bear case scenario (20%) to factor in
increased uncertainty about economic growth following
recent developments with regard to inflation. We have
also reduced our earnings estimates to build in weaker
revenue progression in F12/13, reflecting lower margins
and loan growth assumptions.
Target Price Discussion
We arrive at our price target of Rs800 using a
probability-weighted three-phase residual income model – a
five-year high growth period, a 10-year maturity period,
followed by a declining period.
We have raised our earnings estimates for F2011 by 15% and
cut our earnings estimates by 14% for F2012 and F2013 each.
We now project lower revenue growth in F12/F13, reflecting
lower margins and loan growth assumptions.
Details of our probability-based valuation methodology:
a) 20% weight to bear case scenario (vs. 5% previously):
We factor in the increased economic growth uncertainty
following recent developments with regard to inflation. There is
a risk that if inflation were to be sustained at higher level for
longer, there may be a disruptive rise in interest rates – hence
leading to asset quality issues. We believe that until inflation
expectations are brought under control, the market is likely to
continue to assign a reasonable probability to this outcome.
b) 20% weight to bull case scenario (vs. 25% previously):
We factor in the potential of stronger than expected economic
growth and better than expected performance of underlying
businesses at Canara Bank.
c) We assign the residual 60% weight to the base case
scenario (vs. 70% previously): This os premised on our
expectation that economic growth will remain robust in the
coming year. This will help credit costs to remain stable at
current low levels at Canara Bank. However, in this scenario
we build in margin compression from current levels as the
impact of rising rates will continue to filter through.
We have reduced our bull case value by 7%, to Rs1000 per
share, and our base case value by 4%, to Rs860per share. Our
bear case value is unchanged at Rs425 per share.
We use a cost of equity of 14.1%, assuming a beta of 1.0, a
risk-free rate of 8.1% (current Indian 10-year government bond
yield), and a market risk premium of 6%.
Risks to Our Price Target
Key downside risks to our price target include slower than
expected loan growth, sharp compression in NIMs and marked
deterioration in asset quality (restructured loans slippages).
Upside risks include: fee income being stronger than
expectations and credit costs being lower than expectations.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Canara Bank :F3Q11: Good Numbers
What's Changed
Price Target Rs920 to Rs800
EPS F11e/12e/13e +15%/-14%/-14%
Earnings surprise was driven mainly by lower than
expected credit costs: Canara Bank reported F3Q11
profits of Rs11.1 bn. The bank benefited from a lower
effective tax rate this quarter – however, at the PBT level,
profits were up 8% QoQ / 4% YoY and were 20% ahead
of our estimates.
Results highlights: a) Volume growth was strong.
Loans grew by 8% QoQ and 29% YoY. Deposits grew
by 6% QoQ and 25% YoY. CASA moved 10 bps higher
QoQ to 29%. b) Computed NIM was flat QoQ to at
~3.31%. NII grew by 6% QoQ / 43% YoY. c) Core
non-interest income progression was weak at +1% QoQ
/ +15% YoY. d) Canara Bank has made provisions
related to second pension option related liability in
F9M11 and indicated that it would amortize the liability
over five years, pending RBI guidelines. This implies a
total liability of Rs22.5 bn. e) New NPL slippages and
credit costs were lower at Rs6.2bn (1.4% of loans,
annualized) and Rs1.3 bn (0.28%). However, the
negative was that the NPL coverage (including tech
writeoffs) ratio moved lower by 120 bps QoQ to 75.9%.
Maintain OW: Core PPOP growth at Canara Bank was
robust at 5% QoQ / 44% YoY in QE Dec-10, driven by
robust revenue growth. Asset quality trends have been
tracking better than expectations. We believe valuations
are attractive at 6.5x F2012e P/E and 1.2x F2012e BV.
Reducing price target to reflect higher bear case
probability, estimate changes: We are reducing our
price target from Rs920 to Rs800. We now apply higher
probability to our bear case scenario (20%) to factor in
increased uncertainty about economic growth following
recent developments with regard to inflation. We have
also reduced our earnings estimates to build in weaker
revenue progression in F12/13, reflecting lower margins
and loan growth assumptions.
Target Price Discussion
We arrive at our price target of Rs800 using a
probability-weighted three-phase residual income model – a
five-year high growth period, a 10-year maturity period,
followed by a declining period.
We have raised our earnings estimates for F2011 by 15% and
cut our earnings estimates by 14% for F2012 and F2013 each.
We now project lower revenue growth in F12/F13, reflecting
lower margins and loan growth assumptions.
Details of our probability-based valuation methodology:
a) 20% weight to bear case scenario (vs. 5% previously):
We factor in the increased economic growth uncertainty
following recent developments with regard to inflation. There is
a risk that if inflation were to be sustained at higher level for
longer, there may be a disruptive rise in interest rates – hence
leading to asset quality issues. We believe that until inflation
expectations are brought under control, the market is likely to
continue to assign a reasonable probability to this outcome.
b) 20% weight to bull case scenario (vs. 25% previously):
We factor in the potential of stronger than expected economic
growth and better than expected performance of underlying
businesses at Canara Bank.
c) We assign the residual 60% weight to the base case
scenario (vs. 70% previously): This os premised on our
expectation that economic growth will remain robust in the
coming year. This will help credit costs to remain stable at
current low levels at Canara Bank. However, in this scenario
we build in margin compression from current levels as the
impact of rising rates will continue to filter through.
We have reduced our bull case value by 7%, to Rs1000 per
share, and our base case value by 4%, to Rs860per share. Our
bear case value is unchanged at Rs425 per share.
We use a cost of equity of 14.1%, assuming a beta of 1.0, a
risk-free rate of 8.1% (current Indian 10-year government bond
yield), and a market risk premium of 6%.
Risks to Our Price Target
Key downside risks to our price target include slower than
expected loan growth, sharp compression in NIMs and marked
deterioration in asset quality (restructured loans slippages).
Upside risks include: fee income being stronger than
expectations and credit costs being lower than expectations.
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