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Canara Bank (CNBK.BO, Rs600.95, OW, PT Rs755)
Investment Thesis
• Valuations for Canara Bank are
attractive at 7.0x F2012E P/E and 1.1x
BV.
• Core revenue trends have been doing
well with margins recovering to near
peak levels.
• Asset quality trends have been
tracking better than expectations.
Coverage ratio is above RBI
requirement at 76%.
• CASA ratio is weaker versus other
peers at 29%. We have already built
50 bps margin compression by
end-F12 into our numbers.
• Higher government stake at 73%
means that the bank could raise a
significant amount of capital through
dilutive equity issues.
Key Value Drivers
• Margin progression.
• Trend in loan growth.
• Fee income growth.
• Credit costs.
• Operating costs.
Potential Catalysts
• Margin progression in F2011 and F12
• Slippage from restructured loans
which will be reported in QE March
2011 and QE June 2011 results.
• Trend in system-wide loan growth.
Key Risks
• Very sharp rise in long bond yields
(Modified duration of AFS portfolio at
4.04 years as of Dec-10)
• Higher proportion of infrastructure
loans (23% of total) vs. peers.
• New impaired loan formation
re-accelerates.
• Muted system-wide loans
Price Target Rs755 Derived from our probability weighted residual income model.
Bull
Case
Rs950
1.8x F2013e
BVPS
Stronger than expected macro outlook leads to faster revenue
growth: Loan growth is higher than our base case estimates at
25% for F2012/13. Fee income and margin progression is much
stronger than expectations driving strong revenue growth.
Base
Case
Rs800
1.5x F2013e
BVPS
Margin compression driven by rise in cost of deposits: Loan
book grows at 16% in F2012 and 18% in F2013. Reported margins
compress from 3.3% in F3Q11 to 2.8% in F4Q12e. Credit costs
(annual) assumed to be at 74 bps in F2012E vs. 45 bps in F2011E
and 93 bps in F2010.
Bear
Case
Rs425
0.8x F2013e
BVPS
Disruptive rise in rates – higher than expected credit costs;
loan growth remains muted: Loan growth will be below base
case expectation at 13%. Margins compress more than our base
case estimates driven by disruptive rise in rates owing to capital
outflows. There are material slippages from restructured loans and
credit cost are higher than base case at 100 bps.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Canara Bank (CNBK.BO, Rs600.95, OW, PT Rs755)
Investment Thesis
• Valuations for Canara Bank are
attractive at 7.0x F2012E P/E and 1.1x
BV.
• Core revenue trends have been doing
well with margins recovering to near
peak levels.
• Asset quality trends have been
tracking better than expectations.
Coverage ratio is above RBI
requirement at 76%.
• CASA ratio is weaker versus other
peers at 29%. We have already built
50 bps margin compression by
end-F12 into our numbers.
• Higher government stake at 73%
means that the bank could raise a
significant amount of capital through
dilutive equity issues.
Key Value Drivers
• Margin progression.
• Trend in loan growth.
• Fee income growth.
• Credit costs.
• Operating costs.
Potential Catalysts
• Margin progression in F2011 and F12
• Slippage from restructured loans
which will be reported in QE March
2011 and QE June 2011 results.
• Trend in system-wide loan growth.
Key Risks
• Very sharp rise in long bond yields
(Modified duration of AFS portfolio at
4.04 years as of Dec-10)
• Higher proportion of infrastructure
loans (23% of total) vs. peers.
• New impaired loan formation
re-accelerates.
• Muted system-wide loans
Price Target Rs755 Derived from our probability weighted residual income model.
Bull
Case
Rs950
1.8x F2013e
BVPS
Stronger than expected macro outlook leads to faster revenue
growth: Loan growth is higher than our base case estimates at
25% for F2012/13. Fee income and margin progression is much
stronger than expectations driving strong revenue growth.
Base
Case
Rs800
1.5x F2013e
BVPS
Margin compression driven by rise in cost of deposits: Loan
book grows at 16% in F2012 and 18% in F2013. Reported margins
compress from 3.3% in F3Q11 to 2.8% in F4Q12e. Credit costs
(annual) assumed to be at 74 bps in F2012E vs. 45 bps in F2011E
and 93 bps in F2010.
Bear
Case
Rs425
0.8x F2013e
BVPS
Disruptive rise in rates – higher than expected credit costs;
loan growth remains muted: Loan growth will be below base
case expectation at 13%. Margins compress more than our base
case estimates driven by disruptive rise in rates owing to capital
outflows. There are material slippages from restructured loans and
credit cost are higher than base case at 100 bps.
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