Canara Bank - Core earnings, asset quality weak; Sell
Key takeaways
Weak credit growth; CASA share and NIM decline. While Canara Bank’s advances rose 10.8% yoy (3.2% qoq), deposits grew faster, at 14.2% yoy, thereby decreasing credit-deposit 199bps yoy to 65.4%. Advances growth was driven by the priority sector (27.3% yoy) and farm loans (38% yoy). While NIM fell 17bps yoy (3bps qoq) to 2.2%, the proportion of CASA decreased 16bps yoy (106bps qoq) to 23.1%.
Modest fee income, robust trading profits, declining productivity. While fee income grew 16.2% yoy (3% qoq), trading profits rose 349% yoy to `4.4bn and comprised 23.4% of pre-provisioning profits (7.1% in 1QFY13). Productivity worsened, with core cost-to-income increasing 92bps yoy to 47.8%. With modest business growth prospects, fee income and operating leverage are unlikely to improve substantially. Over FY13-15, we expect fees to post a 15.7% CAGR, with cost-to-assets at ~1.3%.
Asset quality worsens, large loan restructuring, low NPA coverage. Gross NPA grew 17.1% qoq, with fresh slippages of `26.9bn (annualised, 4.5% of loans). NPA coverage fell 41bps qoq to 15.3% and is still the lowest of peers. In 1QFY14, `16.8bn of loans were restructured, with total restructured loans at `199bn (8% of loans).
Our take. Due to lower credit growth and higher NPA assumptions, we slash our FY14 and FY15 net profit estimates 33.1% and 28.4% respectively. Hence, we lower our target from `405 to `239. We maintain our Sell rating, since we expect near-term profitability to be constrained by sluggish business and weak asset quality.Also, the RBI's recent liquidity-tightening measures are a valuation overhang. While the present valuation appears to price in asset-quality concerns, persistingperceptions of default risk would restrict a valuation re-rating. At our Mar’14 target, the stock would quote at PABV of 0.6x FY14e and 0.5x FY15e. Our target is based on the two-stage DDM (CoE: 14.5%; beta: 0.9; Rf: 8%). Risks. Faster credit growth, sharp decline in defaults.
| Thanks & Regards Anand Rathi Institutional Research |
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