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Canara Bank
Issues galore
Event
Downgrading to Underperform: We are cutting earnings sharply by 14% for
FY13E and 18% for FY14E driven by higher credit costs. We are reducing
our TP by 30% to Rs370 driven by lower ROE and earnings growth. We
downgrade the stock to Underperform from Neutral.
Impact
Asset quality worry is the biggest: Canara, amongst the PSUs, has the
largest exposure to the power sector and SEBs and close to 13% of loans are
exposed to the power sector. We expect stressed assets as a % of net worth
to double from 50% in FY11 to 100% in FY13E driven by large restructurings
in the power sector.
Poorest deposit franchise: Canara Bank’s CASA at sub-28% levels clearly
is the lowest amongst large banks and the bank traditionally has been relying
on a large quantum of bulk deposits to fund growth. We believe NIMs are
likely to be under pressure and expect them to decline 50bps YoY to 2.7% in
FY12E.
Management change due in Sept-12: Management changes in PSU banks
have caused a lot of uncertainty in PSU banks as reflected by past
experiences and the current Chairman is due for retirement in Sept-2012.
Anaemic fee income growth: Canara Bank’s fee income growth has been
anaemic mainly on account of its poor state of technology. The bank has been
a laggard in terms of implementing CBS compared to its peers.
Mystery of lower tax rate remains: Canara Bank’s tax rate at 20% is much
lower than any of its peers. The management justifies this on the back of
higher write-offs and higher infrastructure lending where there are tax breaks.
However that still is not a convincing reason to us as to how the tax rate could
be so low when the average tax rate for other PSU banks is close to 30%.
Earnings and target price revision
Cutting earnings sharply by 14% for FY13E and 18% for FY14E driven by
higher credit costs. We are reducing our TP by 30% to Rs370 driven by lower
ROE and earnings growth.
Price catalyst
12-month price target: Rs370.00 based on a Gordon Growth methodology.
Catalyst: Increased slippages and restructuring, margin pressures
Action and recommendation
Valuations “look” cheap but actually they are not: With stressed assets at
100% of net-worth, an extremely low NPL coverage ratio of sub-25% on a
reported basis, looking at P/BV becomes meaningless to us. Reiterate
Underperform with TP of Rs370.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Canara Bank
Issues galore
Event
Downgrading to Underperform: We are cutting earnings sharply by 14% for
FY13E and 18% for FY14E driven by higher credit costs. We are reducing
our TP by 30% to Rs370 driven by lower ROE and earnings growth. We
downgrade the stock to Underperform from Neutral.
Impact
Asset quality worry is the biggest: Canara, amongst the PSUs, has the
largest exposure to the power sector and SEBs and close to 13% of loans are
exposed to the power sector. We expect stressed assets as a % of net worth
to double from 50% in FY11 to 100% in FY13E driven by large restructurings
in the power sector.
Poorest deposit franchise: Canara Bank’s CASA at sub-28% levels clearly
is the lowest amongst large banks and the bank traditionally has been relying
on a large quantum of bulk deposits to fund growth. We believe NIMs are
likely to be under pressure and expect them to decline 50bps YoY to 2.7% in
FY12E.
Management change due in Sept-12: Management changes in PSU banks
have caused a lot of uncertainty in PSU banks as reflected by past
experiences and the current Chairman is due for retirement in Sept-2012.
Anaemic fee income growth: Canara Bank’s fee income growth has been
anaemic mainly on account of its poor state of technology. The bank has been
a laggard in terms of implementing CBS compared to its peers.
Mystery of lower tax rate remains: Canara Bank’s tax rate at 20% is much
lower than any of its peers. The management justifies this on the back of
higher write-offs and higher infrastructure lending where there are tax breaks.
However that still is not a convincing reason to us as to how the tax rate could
be so low when the average tax rate for other PSU banks is close to 30%.
Earnings and target price revision
Cutting earnings sharply by 14% for FY13E and 18% for FY14E driven by
higher credit costs. We are reducing our TP by 30% to Rs370 driven by lower
ROE and earnings growth.
Price catalyst
12-month price target: Rs370.00 based on a Gordon Growth methodology.
Catalyst: Increased slippages and restructuring, margin pressures
Action and recommendation
Valuations “look” cheap but actually they are not: With stressed assets at
100% of net-worth, an extremely low NPL coverage ratio of sub-25% on a
reported basis, looking at P/BV becomes meaningless to us. Reiterate
Underperform with TP of Rs370.
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