Canara Bank -Good numbers but headwinds remain: Macquarie Research

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Canara Bank
Good numbers but headwinds remain
Event
 Canara Bank reported 3Q11 PAT of Rs11.1bn, 11% ahead of our estimate.
The surprise was mainly driven by higher net interest income and lower
provisions. We believe the bank continues to face margin and opex
headwinds and retain our Underperform on the stock.

Impact
 3Q margins surprise on lower cost of funds. Nine month NIMs increased
5bp to 3.21% over 1H NIMs versus our expectations of decline. Like its peers,
the higher cost of deposits has yet to catch up with the bank. Management
attributes this to opportunistic mopping up of funds in October-November
when the cost of funds was relatively lower. CASA ratio remains poor at 30%,
making the bank more vulnerable than peers to a higher funding cost
environment. We are building in ~20bp NIM compression in 4Q11.
 Sharp upward revision in pension provision estimates. Management has
estimated provisions for the second option of pension to be Rs22bn. This is
12% of FY11E net worth. The latest estimate is significantly higher than the
~Rs6bn estimate management had given in earlier interactions. We have
revised our opex estimates higher.
 Loan growth strong on back of infrastructure, mortgages- Loan growth
showed good traction on the back of infra and mortgages. In infra, power has
been a key driver, forming 13% of the overall book. While the exposure to
power and infra is on the higher side, management is still comfortable given
that nearly half of power exposure is in the form of short-term loans to state
utilities.
 Other highlights of analyst conference call-sluggish fees, delays in
automating NPL recognition. Core fees declined 8%YoY. Management
attributes it to lower insurance distribution fees. .It is also facing difficulty in
automating NPL recognition for all accounts by March 2011, particularly for
agri accounts. Asset quality overall has been slightly better in 3Q with
delinquencies declining from 1.4% of loans in 2Q11 to 1.2%.
Earnings and target price revision
 We have increased FY11E and FY12E earnings by 9% and 2% respectively
while cutting FY13E earnings by 5%. Higher NIMs have been offset by higher
opex and lower fees.
Price catalyst
 12-month price target: Rs520.00 based on a Gordon Growth methodology.
 Catalyst: NIM and opex pressures in 4Q11E
Action and recommendation
 We see continued opex and margin headwinds for the bank combined with
sluggish fees. Maintain Underperform with a TP of Rs520. Our TP values the
stock at 1.27xFY12E adjusted BVPS..