Canara Bank: Weak growth and deteriorating asset quality drags profitability In Q1FY13,:: Karvy

Weak growth and deteriorating asset quality
drags profitability
In Q1FY13, Canara Bank’s performance came in below our expectations
with PAT growing at 6.8% YoY (down 6.5% QoQ) to Rs7.75 bn, owing to
weak growth in advances at 4.9% YoY (down 3% QoQ). NIMs declined 10
bps QoQ to 2.4%, Asset quality continued to deteriorate owing to higher
slippages and restructuring of loans. The bank reported treasury profit of
Rs988 mn against a loss of Rs 770 mn.

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 Asset Quality disappoints: Canara Bank’s asset quality continued to
deteriorate owing to slippages amounting to Rs15 bn and restructuring
of loans worth Rs60.1 bn (including SEB loans amounting to Rs55 bn).
Gross NPA stood at 1.98% and Net NPA at 1.66% higher from 1.76% and
1.46% respectively in Q4FY12. Provision coverage ratio stood at 66.5%.
 Lackluster loan Growth: Advances grew at 4.9% YoY (down 3% QoQ)
owing to weak economic environment. Deposits grew at a better pace of
11.5% YoY. Consequently, C‐D ratio declined 367 bps to 67.4%
sequentially. CASA has been on a declining trend with decline of 207 bps
YoY and 191 bps sequentially to 23.3%.
 Expansion in NIMs: NIMs declined 10 bps sequentially and 2 bps from
last year to 2.4% reflecting weak credit growth and declining C‐D ratio.
Management has guided for improvement in NIMs which would take
place by improving C‐D ratio and by shedding higher cost bulk deposits
during the course of the year.
Outlook & Valuation
At the CMP the stock is trading at 4.7x and 3.8x FY13E and FY14E earnings,
and at 0.8x and 0.7x P/ABV FY13E and FY14E respectively. We have reduced
our estimates by 5% and 3% for FY13E and FY14E respectively after factoring
weaker credit growth and concerns pertaining to asset quality. Consequently,
we have reduced our price target by 6% to Rs434 valuing the stock at 0.76x
FY14E Adj. BV and continue to maintain HOLD rating on the stock.
Risks: Asset quality could have bottomed.