Canara Bank Strong results; upgrade to HOLD: Emkay

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Canara Bank

Strong results; upgrade to HOLD

HOLD

CMP: Rs 602                                        Target Price: Rs 640

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n     Canara Bank’s NII at Rs21.2 inline with expectation, however PAT at Rs11.1bn significantly ahead street expectation

n     The NII grew by 43.4%yoy to Rs21.2bn driven by 7.7%qoq growth in advances and stable NIM’s at 2.9%

n     The NPAs remained stable with a marginal increase in gross NPAs at Rs27.5bn. Strong recoveries and upgradation help keep provisioning at 0.3% vs an average of 0.6% for FY08-10

n     The stock has corrected sharply over last three months hence valuations looks reasonable now at 1.7x FY11E and 1.3x FY12E ABV, hence upgrade to HOLD with TP of Rs640

NII growth robust at 43.4% yoy

The NII grew by 43.4%yoy to Rs21.2bn inline with expectation. The growth in NII was

driven by 7.8%qoq growth in advances and stable NIM’s at 3.2%



….as advances grew by a strong 7.8%qoq

CNBK’s advances grew by a robust 7.8%qoq to Rs1.9tn led by strong growth in agri

(13.3% qoq) and home loans (23% qoq).

CASA mix remains stable but still lower than industry average
Despite strong growth in advances the CASA mix remained stable at 29.0% as CASA
deposit grew by 6.2%qoq, while term deposit grew by slightly lower 5.5%. However, at 29%
the CASA proportion still remains at lower than industry average.

Non-trading other income continues to grow modest but growth picking up
The total fee income (core + forex + others) has grown by a modest 14% yoy for Q3FY11
and 11.4% yoy for M9FY11. However, the growth number in the total fee income has been
moving upwards as it has now moved at least in double digit after averaging at ~7% for last
four quarters.

Upgrades/recoveries help keep provisioning low
Driven by strong upgrades/cash recoveries for M9FY11 (Rs15bn; net additions to NPAs are
~Rs1.7bn), the provisioning requirement has been low. However, we believe that the
provisions for M9FY11 could have been higher by ~1.1bn if the bank were to provide at
70% on the net incremental slippages.

Capital adequacy comfortable
The bank is comfortably placed with respect to capital adequacy. At the end of Q3FY11,
CNBK’s CAR was 13.0% (14.5% including M9FY11 profit), while tier I capital adequacy was
at 8.3% (10% including M9FY11 profit). The bank still has undiluted 73.1% GOI holding,
which gives it large headroom under both Tier I and Tier II to raise capital and support
business growth momentum.
Valuations and view
At the CMP, the stock is quoting at 1.7x FY11E and 1.3x FY12E ABV (1.4x adjusted fully for
pension liabilities). The stock has corrected sharply over last three months hence valuations
looks reasonable now, hence upgrade to HOLD with price target of Rs640.