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Canara Bank's net interest margin slid sharply in 1Q, driven by a spike in the cost of deposits.
Given the high interest rate environment, we expect continued pressure on the margin front. The
bank has relatively high loan exposure to the infrastructure segment. We cut our target price and
downgrade to Hold.
1QFY12: steep decline in NIMs; provision coverage ratio falls
Canara Bank’s net interest margin (NIM) fell 70bp qoq to 2.42% in 1Q, mainly driven by a 125bp
qoq spike in the cost of deposits. This prompts us to cut our FY12 NIM forecast to 2.33% from
2.55%. Gross and net NPLs both rose by around a net Rs5.2bn qoq, resulting in the provision
coverage ratio falling to 20.4% from 24.0% the previous quarter. As per RBI norms, provision
coverage fell to 69.5% in 1QFY12 from 73.0% in 4QFY11.
Wholesale-funded liability mix; higher-than-peer exposure to infrastructure
With bulk deposits accounting for around 32% of Canara Bank’s total deposits as of June 2011,
the implied cost of term deposits + borrowings rose 80bp qoq to about 8.2% in 1QFY12 (see
Table 2). Given our expectation of an elevated interest rate environment in the medium term, we
expect NIMs to remain under pressure. The bank has higher-than-peer exposure to the
infrastructure sector (see Table 3), which indirectly limits the extent of transmission of high
interest rates.
Higher slippage ratio, but higher recoveries too
Slippages fell to 80bp of average loans in 1QFY11 from 110bp the previous quarter. Of the
incremental slippages of Rs13.7bn, about 50% were due to the bank’s transition to system-based
NPL recognition. Although Canara Bank’s slippage ratio remains high, its consistently high cash
recovery provides comfort: total cash recovery as a proportion of opening gross NPLs was 24% in
1QFY12, 87% in FY11, 73% in FY10 and about 100% in FY09. As of June 2011, stressed loans
We reduce our earnings forecasts and downgrade to Hold
We reduce our earnings forecasts by around 7% in FY12 and 3% in FY13, largely driven by a cut
in our core earnings estimates. We have reduced our sustainable ROE assumption, which results
in us downgrading our target price to Rs530 (from Rs658) and our recommendation to Hold. At
our target price, the stock would trade at 1.3x FY12F adjusted BV and 5.5x FY12F earnings.
were about 5.6% of total loans (with 1.6% being gross NPLs and 4.0% being restructured loans).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Canara Bank's net interest margin slid sharply in 1Q, driven by a spike in the cost of deposits.
Given the high interest rate environment, we expect continued pressure on the margin front. The
bank has relatively high loan exposure to the infrastructure segment. We cut our target price and
downgrade to Hold.
1QFY12: steep decline in NIMs; provision coverage ratio falls
Canara Bank’s net interest margin (NIM) fell 70bp qoq to 2.42% in 1Q, mainly driven by a 125bp
qoq spike in the cost of deposits. This prompts us to cut our FY12 NIM forecast to 2.33% from
2.55%. Gross and net NPLs both rose by around a net Rs5.2bn qoq, resulting in the provision
coverage ratio falling to 20.4% from 24.0% the previous quarter. As per RBI norms, provision
coverage fell to 69.5% in 1QFY12 from 73.0% in 4QFY11.
Wholesale-funded liability mix; higher-than-peer exposure to infrastructure
With bulk deposits accounting for around 32% of Canara Bank’s total deposits as of June 2011,
the implied cost of term deposits + borrowings rose 80bp qoq to about 8.2% in 1QFY12 (see
Table 2). Given our expectation of an elevated interest rate environment in the medium term, we
expect NIMs to remain under pressure. The bank has higher-than-peer exposure to the
infrastructure sector (see Table 3), which indirectly limits the extent of transmission of high
interest rates.
Higher slippage ratio, but higher recoveries too
Slippages fell to 80bp of average loans in 1QFY11 from 110bp the previous quarter. Of the
incremental slippages of Rs13.7bn, about 50% were due to the bank’s transition to system-based
NPL recognition. Although Canara Bank’s slippage ratio remains high, its consistently high cash
recovery provides comfort: total cash recovery as a proportion of opening gross NPLs was 24% in
1QFY12, 87% in FY11, 73% in FY10 and about 100% in FY09. As of June 2011, stressed loans
We reduce our earnings forecasts and downgrade to Hold
We reduce our earnings forecasts by around 7% in FY12 and 3% in FY13, largely driven by a cut
in our core earnings estimates. We have reduced our sustainable ROE assumption, which results
in us downgrading our target price to Rs530 (from Rs658) and our recommendation to Hold. At
our target price, the stock would trade at 1.3x FY12F adjusted BV and 5.5x FY12F earnings.
were about 5.6% of total loans (with 1.6% being gross NPLs and 4.0% being restructured loans).
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