Canara Bank Poor operating performance :: Macquarie Research,

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Canara Bank
Poor operating performance
Event
 Canara Bank continues the trend of PSU banks disappointing on operating
metrics. Headline PAT of Rs9bn was 7% below our estimate, and the bank
disappointed on NIM and asset quality. We have lowered our TP to Rs600
from Rs650 to primarily factor in QIP-related dilution. We maintain a Neutral
rating as we see limited downside given current valuations of the stock.

Impact
 Delinquencies see substantial rise, partly fuelled by automatic
recognition of NPLs. Delinquencies were up to Rs18bn from Rs5–6bn seen
in the last three quarters. A large chunk, ~Rs5–6bn, as per management
came from automatic recognition of NPLs from the smaller accounts. Canara
has been a laggard, in our view, on this count. The bank has now automated
NPL recognition for ~90% of its loan accounts. The remaining 10% would be
done progressively, so NPL accretion may slow on this count.
 NPLs were up sharply in both the agri and SME portfolios this quarter – in our
view worrying because the delinquencies are from non-restructured accounts.
We believe the low absolute coverage is likely to keep provisioning high in
FY12E as well.
 NIMs feel the heat of poor liabilities franchise. NIMs fell sharply, by 40bp
QoQ, to 2.9%. CASA fell to 28% from 29% in 3Q11– the worst amongst
peers. We expect deposit rates to remain at elevated levels in the near term,
so pressure on margins should continue. However, some relief could come
from asset repricing in 2H11. Overall we expect NIM to decline another ~25bp
in FY12 over FY11.
 Lower pension opex should help Canara as well in FY12E. Like the other
PSU banks, lower pension opex is likely to support earnings. The bank has
provided for Rs5.2bn of retirees’ pension-related provisions this quarter,
softening the blow with partial writeback of gratuity provisions. In all the bank
did Rs10bn of pension and gratuity-related provisioning in FY11, which should
go down to ~Rs5bn in the next year.
Earnings and target price revision
 We have adjusted EPS down by 5–8% primarily taking into account the QIPrelated equity issuance. TP is down from Rs650 to Rs600 due to lower
sustainable ROE.
Price catalyst
 12-month price target: Rs600.00 based on a Gordon Growth methodology.
 Catalyst: Improvement in asset quality toward 2H12E.
Action and recommendation
 Maintain Neutral. The stock looks cheap at current valuations, and we
believe downside may be limited. However continued delinquencies and
pressure on NIMs is likely to remain an overhang