Buy Canara Bank:Healthy margins and lower credit cost driving earning upgrades: Motilal oswal,

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Healthy margins and lower credit cost driving earning upgrades
Return ratios remain healthy despite factoring in higher credit cost
Over FY02-10, Canara Bank (CBK) posted superior return ratios of 1.1%+ and RoE of 23%+.
Strong margin performance, robust business growth and lower credit costs are leading
to sharp upgrades in earnings estimates over the past few quarters. Although margins
are likely to moderate (17bp YoY in FY12), expected improvement in fee income growth
and strong control over opex will ensure core operating profit growth of 20%+. Despite
building in higher credit costs of 60bp for FY12 and FY13 (v/s 40bp in FY11), we expect
return ratios to be strong with RoA of ~1.3% and RoE of 23%+. Strong core operating
performance and favorable valuations make CBK an attractive investment opportunity.
The stock trades at P/BV of 1x FY13E. Maintain Buy, target price of Rs820 (1.4x FY13E BV).
Growth to remain strong; CASA a key focus area: Post successful restructuring
of the balance sheet in FY08, loans grew 26% CAGR over FY08-10 driven largely by
corporate and infrastructure segment. Over FY10-13, we expect growth momentum
to continue with 23% CAGR in loans and 22% in deposits. CBK's CASA mix (~31%
at the end of December 2010) continues to lag its peers but with increased thrust of
the management, CASA growth has improved to 27% in 9MFY11 v/s 21% in FY10
and 12% in FY09. The management expects to improve CASA ratio by 100-200bp
every year, which will strengthen its liability profile further.

Capital not a constraint for growth: Recently Canara bank has raised ~Rs20b
(~12% of existing networth) via QIP leading to increase in Tier-I ratio to 11% v/s 9.5%
earlier. Higher GOI holding at ~68% (Post dilution) and strong RoE provides enough
room for the bank to grow.
Factoring in margin moderation of 25bp over FY11-13, may surprise positively:
In FY09 and FY10, CBK managed its NIM in a 2.7-2.8% range despite high volatility
in interest rates, displaying a healthy ALM profile. Margin improved further to 3.2% in
9MFY11 due to healthy CASA growth and better pricing power. In a rising rate scenario
with a relatively low CASA ratio and a high proportion of bulk deposits we expect
NIMs to moderate. We have factored in gradual moderation of 25bp over FY11-13
despite capital raising. Over 2QFY11 and 3QFY11, margin performance has been
higher than expected, leading to sharp upgrades in earnings. Thus, positive surprises
can not be ruled out.
Asset quality improving; though high proportion of infra loans remain a risk:
CBK has improved asset quality with a decline in slippage ratio for 9MFY11 to 1.3%
against 2.4% in FY10 and 2.04% over FY05-10. However, given a high restructured
loan book, strong loan growth over the past couple of years, a higher proportion of
infrastructure loans and volatile asset quality in the past, the bank can surprise
negatively. Accordingly, we are factoring in slippages of 1.75% in FY12 (1.4% in
300 FY11) and loan loss provisions of 60bp in FY12 v/s 40bp in FY11.


3QFY11 highlights
Key positives
 In 3QFY11 NIM was 3.21% v/s 3.16% in 2QFY11
and 2.71% in 3QFY10. Decline in cost of deposits
(3bp QoQ), improvement in yield on loans and
investments (6bp QoQ) and CD ratio (up 140bp QoQ
at 72.1%) led to sequentially higher NIM.
 For 9MFY11, slippages were Rs16.7b (annualized
slippage ratio of 1.3% v/s 2.4% in FY10). Stable
asset quality resulted in lower provisioning expenses
of Rs1.57b v/s Rs1.58b in 2QFY11.
 While reported operating profits grew just 3% YoY,
core operating profits grew 44% YoY (up 5% QoQ)
led by strong NII growth. In 9MFY11, core operating
profits grew 38% YoY to Rs36.7b.
Key negatives
 3QFY11, reported fee income growth was muted
with a ~6% YoY decline and for 9MFY11, fee income
remained flat YoY.
Other highlights
 Loans grew 6.5% QoQ and 29% YoY to Rs1.9t.
Key drivers for loan growth were infrastructure loans
(up 63% YoY, up 9% QoQ), retail loans (up 35%
YoY, up 11% QoQ) and SME loans (up 24% YoY,
up 8% QoQ).