Canara Bank: Growth takes precedence ::Kotak Sec

Canara Bank (CBK)
Banks/Financial Institutions
Growth takes precedence. After a period of consolidation, Canara Bank has stepped
up growth (11% qoq in loans), much to our disappointment. NIM was stable as the
benefit of declining cost of funds was largely passed to borrowers. Loan impairment
was high and driven by corporate loans. We continue to maintain our REDUCE rating
with TP at `415 (unchanged) and view the recent shift in strategy to growth under the
new management as a key concern. Earnings are likely to remain volatile given the
high-duration investment portfolio and skewed corporate loan exposure.

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Rising frustration on the renewed focus on growth by the new management; maintain REDUCE
After consolidating the balance sheet for ~6 quarters, Canara Bank, under the new management
has taken a renewed focus on growth. Total loans grew 11% qoq, the highest growth since
4QFY11 led by strong growth in corporate loans (SME and large). Strong growth in the current
environment risks refinancing of loans that are susceptible to quick mortality or subject to
extremely low margins: we fear of a combination of both. Frequent changes in top management
over the past few years has been a source of concern as the bank looks to give a higher priority to
assets side of the balance sheet as compared to improving their share of liabilities – which the
bank is consistently losing to competitors, despite a strong presence in key markets.
We maintain our REDUCE rating and cut FY2014/15 estimates by 1-4%. We are valuing the bank
at `415 (unchanged) which implies 0.9X book and 6X EPS. Return ratios are weak (<14 and="" p="" roe="">earnings growth primarily on a weak base of the past few years). The bank’s high exposure to SEB
(lower margins in the new reform package) and low provisions for the new wage settlement are
key medium-term risks to earnings.
Loan impairment ratios remain high; slippages led by large corporate portfolio
Slippages for the quarter were lower at 2% but restructured loans were high at ~5% of loans for
the quarter. Gross NPLs declined 20 bps qoq to 2.6% of loans primarily on the back of strong loan
growth, healthy recoveries and elevated write-offs.
Fresh restructurings were primarily in the infrastructure portfolio with a combination of power and
road portfolio. The management highlighted that one of the loans (20% of the fresh restructuring)
that was restructured in the current quarter was not accepted by the auditors, which resulted in
the same exposure reported in both the restructured loans as well as NPLs. Restructuring were
negligible in most of the other loan portfolios. A similar experience was found in the slippages too.
We are not too positive on the bank’s loan portfolio, especially on the back of the management’s
aggressive stance on loan growth in an environment where risk of impairment is high (corporate
loans) while the bank’s previous experience in retail has not been favorable.