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Canara Bank (CBK)
Banks/Financial Institutions
Steady quarter; slippages under check. Canara Bank reported another impressive
quarter with margins stable at 3.2%, loan growth impressive at 28% and slippages
lower at 1.2%. We believe that the recent lending rate hikes would cushion the sharp
rise in deposit rates but risk remains as trends on slippages/earnings have been volatile.
Valuations are attractive for the bank at current levels of 1.3X FY2012E PBR delivering
RoEs in the range of 20%. Maintain ADD with a TP of `700 (`740 earlier).
NIM at 3.2% led by stable funding costs and higher lending yields; loans up 29%
Canara Bank’s net interest income (NII) for 3QFY11 was `21 bn (up 43% yoy) driven by stable
funding costs and better lending yields. NIMs for the quarter were maintained at 3.2%. The bank
reported loans at `1.9 tn (up 29% yoy) and deposits were `2.6 tn (up 26% yoy) as of December
2010. Infrastructure loans grew 63% yoy while retail loans grew 35% yoy driven by housing
which grew 69% yoy. CASA deposits grew by 28% yoy and are 29% of deposits (unchanged
qoq). We are factoring loan book growth at 18% CAGR for FY2010-12E and NIMs to decline by
20 bps by FY2012E. We see upside risks to our estimates as the bank took a PLR hike of 75 bps in
December 2010 (about 80% of the book is linked to PLR).
Asset quality stable with provision coverage (including write-offs) at 77%
Gross NPLs were stable qoq at `27.5 bn (1.4% of loans) while net NPL increased 7% qoq to `19
bn (1.1%). Provision coverage (ex write-off) declined to 28% compared to 30% in September
2010. Adjusting for technical write-off, the overall coverage ratio was healthy at 76%. Slippages
for the quarter was about 1.2% (annualized) resulting in lower loan loss provisions (0.5% of
loans). While we see the lower than expected provisions as positive, we would continue to remain
cautious and build higher provisions till FY2012E as slippages from corporate NPLs could be lumpy
in nature.
Only about 65% of the banks business is under system based reporting (without manual
intervention) and the management expects this to improve to 80% by March 2011. Risks of higher
slippages in March 2011 as banks move to system-based recognition.
Muted performance on non-interest income
Non-interest income was at `5.3 bn (down 31% yoy) mainly due to lower treasury gains and core
fee income. Treasury gains were `290 mn against `3 bn in 2QFY11. Core fee income declined 8%
yoy. Income from recoveries was also lower at `650 mn compared to `720 mn in December 2010
compared to September 2010. We are modeling a 16% CAGR in core fee income in FY2010-13E.
Other highlights for the quarter
Cost-income ratio for the quarter was at 43%. The bank has made a provision of `1.1 bn
in the current quarter (`3.4 bn in 9MFY11) for pension and `2 bn (`3.2 bn for 9MFY11)
for gratuity. The bank has estimated a liability of `22 bn as the cost for second pension.
Gratuity expenses have been fully provided in the current quarter. We believe that our
estimates for FY2012E of 10% growth in staff expenses is conservative given that the
bank has completed provision for gratuity and the full impact of second option is
reflected in current year earnings.
Overall capital adequacy is comfortable at 13% with tier-1 capital at 8.3% (10.1%
including profits for 9MFY11).
India Equity Research Reports, IPO and Stock News
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Canara Bank (CBK)
Banks/Financial Institutions
Steady quarter; slippages under check. Canara Bank reported another impressive
quarter with margins stable at 3.2%, loan growth impressive at 28% and slippages
lower at 1.2%. We believe that the recent lending rate hikes would cushion the sharp
rise in deposit rates but risk remains as trends on slippages/earnings have been volatile.
Valuations are attractive for the bank at current levels of 1.3X FY2012E PBR delivering
RoEs in the range of 20%. Maintain ADD with a TP of `700 (`740 earlier).
NIM at 3.2% led by stable funding costs and higher lending yields; loans up 29%
Canara Bank’s net interest income (NII) for 3QFY11 was `21 bn (up 43% yoy) driven by stable
funding costs and better lending yields. NIMs for the quarter were maintained at 3.2%. The bank
reported loans at `1.9 tn (up 29% yoy) and deposits were `2.6 tn (up 26% yoy) as of December
2010. Infrastructure loans grew 63% yoy while retail loans grew 35% yoy driven by housing
which grew 69% yoy. CASA deposits grew by 28% yoy and are 29% of deposits (unchanged
qoq). We are factoring loan book growth at 18% CAGR for FY2010-12E and NIMs to decline by
20 bps by FY2012E. We see upside risks to our estimates as the bank took a PLR hike of 75 bps in
December 2010 (about 80% of the book is linked to PLR).
Asset quality stable with provision coverage (including write-offs) at 77%
Gross NPLs were stable qoq at `27.5 bn (1.4% of loans) while net NPL increased 7% qoq to `19
bn (1.1%). Provision coverage (ex write-off) declined to 28% compared to 30% in September
2010. Adjusting for technical write-off, the overall coverage ratio was healthy at 76%. Slippages
for the quarter was about 1.2% (annualized) resulting in lower loan loss provisions (0.5% of
loans). While we see the lower than expected provisions as positive, we would continue to remain
cautious and build higher provisions till FY2012E as slippages from corporate NPLs could be lumpy
in nature.
Only about 65% of the banks business is under system based reporting (without manual
intervention) and the management expects this to improve to 80% by March 2011. Risks of higher
slippages in March 2011 as banks move to system-based recognition.
Muted performance on non-interest income
Non-interest income was at `5.3 bn (down 31% yoy) mainly due to lower treasury gains and core
fee income. Treasury gains were `290 mn against `3 bn in 2QFY11. Core fee income declined 8%
yoy. Income from recoveries was also lower at `650 mn compared to `720 mn in December 2010
compared to September 2010. We are modeling a 16% CAGR in core fee income in FY2010-13E.
Other highlights for the quarter
Cost-income ratio for the quarter was at 43%. The bank has made a provision of `1.1 bn
in the current quarter (`3.4 bn in 9MFY11) for pension and `2 bn (`3.2 bn for 9MFY11)
for gratuity. The bank has estimated a liability of `22 bn as the cost for second pension.
Gratuity expenses have been fully provided in the current quarter. We believe that our
estimates for FY2012E of 10% growth in staff expenses is conservative given that the
bank has completed provision for gratuity and the full impact of second option is
reflected in current year earnings.
Overall capital adequacy is comfortable at 13% with tier-1 capital at 8.3% (10.1%
including profits for 9MFY11).
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