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Asset quality disappointment
During 4QFY11, Canara’s profit of Rs9bn (up 79% YoY from a low base)
was below estimates largely due to higher than expected NPL provisions.
Margins pressure was intense (down 30bps QoQ) due to faster growth in
assets, rise in share of short-duration investments and lower CASA ratio.
More importantly, fresh slippages rose sharply pushing up delinquency
ratio to 4.3% of last year’s loans. We expect loans to grow at 19% Cagr,
but margin pressures and NPL provisions may cap profit growth to 14%.
Improvement in asset quality will be key to re-rating, we lower our target
price to Rs670 based on 1.3x FY13 adjusted PB. Maintain O-PF.
Earnings below estimates
During 4QFY11, Canara’ net profit rose sharply by 79% YoY (base suppressed
by high NPL and investment provisions), but still fell short of estimates due to
higher NPL provisions that emulated from asset quality pressures. Earnings
could have been under further pressure due to write-off of 2nd pension liability
on retired employees, but for reversal of new gratuity provisions that will now
be amortised over FY11-15. Fee growth of 42% YoY was impressive and is
partly accruing from upward revision in charges on retail services.
Margins under pressure
During 4QFY11, Canara reported among the highest contraction in margins,
down 31bps QoQ to 3%. We believe that the margin compression is coming
from (1) faster growth in loans (up 25% YoY/ 12% QoQ), (2) rise in share of
low yielding short-term investments (to hedge risk of MTM losses), (3) bank’s
lower CASA ratio of 28% of deposits and (4) rise in cost of term deposits.
Fresh slippages were high; offset by higher recoveries & upgrades
During 4QFY11, Canara witnessed sharp rise in slippages and the delinquency
ratio shot-up to 4.3% that is one of the highest in the sector. While fresh
slippages in 4Q could have added 67% to the opening gross NPAs, higher
recoveries and upgrades helped to contain gross NPA growth to just 12% YoY.
Over past few quarters, Canara fresh slippages were lower and hence this rise
in slippages came in as a disappointment. The analysis of composition of
gross NPAs and management comments indicate that most of the fresh
additions were from SME and agriculture segments.
Maintain O-PF
With Tier I CAR at 10.9%, Canara Bank is well capitalised for growth and we
expect loans to grow at 19% Cagr over FY11-13. However, compression in
margins and provisioning pressures would cap profit growth at 14% Cagr. Our
target price of Rs670 is based on 1.3x FY13CL adjusted PB.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Asset quality disappointment
During 4QFY11, Canara’s profit of Rs9bn (up 79% YoY from a low base)
was below estimates largely due to higher than expected NPL provisions.
Margins pressure was intense (down 30bps QoQ) due to faster growth in
assets, rise in share of short-duration investments and lower CASA ratio.
More importantly, fresh slippages rose sharply pushing up delinquency
ratio to 4.3% of last year’s loans. We expect loans to grow at 19% Cagr,
but margin pressures and NPL provisions may cap profit growth to 14%.
Improvement in asset quality will be key to re-rating, we lower our target
price to Rs670 based on 1.3x FY13 adjusted PB. Maintain O-PF.
Earnings below estimates
During 4QFY11, Canara’ net profit rose sharply by 79% YoY (base suppressed
by high NPL and investment provisions), but still fell short of estimates due to
higher NPL provisions that emulated from asset quality pressures. Earnings
could have been under further pressure due to write-off of 2nd pension liability
on retired employees, but for reversal of new gratuity provisions that will now
be amortised over FY11-15. Fee growth of 42% YoY was impressive and is
partly accruing from upward revision in charges on retail services.
Margins under pressure
During 4QFY11, Canara reported among the highest contraction in margins,
down 31bps QoQ to 3%. We believe that the margin compression is coming
from (1) faster growth in loans (up 25% YoY/ 12% QoQ), (2) rise in share of
low yielding short-term investments (to hedge risk of MTM losses), (3) bank’s
lower CASA ratio of 28% of deposits and (4) rise in cost of term deposits.
Fresh slippages were high; offset by higher recoveries & upgrades
During 4QFY11, Canara witnessed sharp rise in slippages and the delinquency
ratio shot-up to 4.3% that is one of the highest in the sector. While fresh
slippages in 4Q could have added 67% to the opening gross NPAs, higher
recoveries and upgrades helped to contain gross NPA growth to just 12% YoY.
Over past few quarters, Canara fresh slippages were lower and hence this rise
in slippages came in as a disappointment. The analysis of composition of
gross NPAs and management comments indicate that most of the fresh
additions were from SME and agriculture segments.
Maintain O-PF
With Tier I CAR at 10.9%, Canara Bank is well capitalised for growth and we
expect loans to grow at 19% Cagr over FY11-13. However, compression in
margins and provisioning pressures would cap profit growth at 14% Cagr. Our
target price of Rs670 is based on 1.3x FY13CL adjusted PB.
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