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Key Takeaways
CBK asset quality to improve in 2HFY12
Canara Bank's (CBK) 1QFY12 slippages were high at INR13.7b as banks shifted their
portfolio between INR0.5m and INR0.2m to CBS for NPA recognition.
The remaining portfolio constitutes ~7% of the book and management expects
slippages of ~INR6b due to transition of its remaining portfolio through systembased
recognition of NPA in 2QFY12.
In 2HFY12, the management expects asset quality to improve significantly, but has
conservatively guided for gross slippages of ~INR40b in FY12 (v/s INR35b in FY11).
The management expects strong recoveries and upgrade, which will provide cushion
to asset quality and can lead to a positive surprise.
Margins bottom out
CBK margins declined ~45bp QoQ to 2.4% in 1QFY12 led by higher slippages and
lag impact of deposit re-pricing.
While slippages are expected to be high in 2QFY12 as well, lower interest income
reversal (management guidance of ~INR1b v/s INR2.1b a quarter ago) and increase
in yield on loans will provide cushion to margins. The management guided for margins
of 2.5-2.6% in 2QFY12 and 2.7-2.8% in FY12.
No sign of stress in power sector exposure
CBK exposure to power and infrastructure is ~INR450b (INR290b towards power
segment), of which INR100b is towards short term loans.
Exposure towards generation companies stands at INR75-80b of which INR35b is
towards private sector and rest towards SEB.
Loans to SEB are largely backed by govt. guarantee while loans to private segment
are disbursed only where the project is on stream. It has been receiving payments
on time and does not foresee any issue in asset quality.
Other details
The CBK management guidance is for loan and deposit growth of ~20%.
The management is focusing on shedding bulk deposits and planning to increase
retail deposits. Bulk deposits form ~35% of overall deposits
Fee income growth is expected to be ~15%.
Valuation and view
Volatile asset quality performance, weak liability side with CASA ratio of ~25%, and
higher proportion of bulk deposits are a concern. Due to high growth and leverage,
RoE will be strong at ~19% in FY12 and FY13. It trades at 4.2x FY13E EPS and 0.7x
FY13E BV. We believe current valuations largely factor in the negatives. Buy.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Key Takeaways
CBK asset quality to improve in 2HFY12
Canara Bank's (CBK) 1QFY12 slippages were high at INR13.7b as banks shifted their
portfolio between INR0.5m and INR0.2m to CBS for NPA recognition.
The remaining portfolio constitutes ~7% of the book and management expects
slippages of ~INR6b due to transition of its remaining portfolio through systembased
recognition of NPA in 2QFY12.
In 2HFY12, the management expects asset quality to improve significantly, but has
conservatively guided for gross slippages of ~INR40b in FY12 (v/s INR35b in FY11).
The management expects strong recoveries and upgrade, which will provide cushion
to asset quality and can lead to a positive surprise.
Margins bottom out
CBK margins declined ~45bp QoQ to 2.4% in 1QFY12 led by higher slippages and
lag impact of deposit re-pricing.
While slippages are expected to be high in 2QFY12 as well, lower interest income
reversal (management guidance of ~INR1b v/s INR2.1b a quarter ago) and increase
in yield on loans will provide cushion to margins. The management guided for margins
of 2.5-2.6% in 2QFY12 and 2.7-2.8% in FY12.
No sign of stress in power sector exposure
CBK exposure to power and infrastructure is ~INR450b (INR290b towards power
segment), of which INR100b is towards short term loans.
Exposure towards generation companies stands at INR75-80b of which INR35b is
towards private sector and rest towards SEB.
Loans to SEB are largely backed by govt. guarantee while loans to private segment
are disbursed only where the project is on stream. It has been receiving payments
on time and does not foresee any issue in asset quality.
Other details
The CBK management guidance is for loan and deposit growth of ~20%.
The management is focusing on shedding bulk deposits and planning to increase
retail deposits. Bulk deposits form ~35% of overall deposits
Fee income growth is expected to be ~15%.
Valuation and view
Volatile asset quality performance, weak liability side with CASA ratio of ~25%, and
higher proportion of bulk deposits are a concern. Due to high growth and leverage,
RoE will be strong at ~19% in FY12 and FY13. It trades at 4.2x FY13E EPS and 0.7x
FY13E BV. We believe current valuations largely factor in the negatives. Buy.
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