Canara Bank | Q2FY15 First Cut Analysis | Performance was below expectation as asset quality pressure continues to persist :: IndiaNivesh

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Net Interest Income (NII) of Canara Bank increased at a modest pace of 8% y-o-y
(-3% q-o-q) to Rs 23.7 bn (our expectation: Rs 25.1 bn) in Q2FY15. Interest income
grew 13% y-o-y to Rs 108.9 bn whereas interest expense grew at a faster pace of
14% y-o-y to Rs 85.3 bn.
Higher trading income might have help the Bank’s overall Non Interest Income to
grow at a healthy pace of 32% y-o-y (-1% q-o-q) to Rs 10.2 bn. Operating expenses
increased 15% y-o-y (+6% q-o-q) to Rs 17.6 bn led by 20% y-o-y increase in other
operating expenses. As a result, cost to income (C/I) ratio (calc) also increased 397
bps q-o-q (+11 bps y-o-y) to 52.04% in Q2FY15.
Pre Provisioning Profit (PPP) increased 14% y-o-y (-9% q-o-q) to Rs 16.3 bn (our
expectation: Rs 17.1 bn). Net profit of Canara Bank was muted on yearly basis (-22%
q-o-q) to Rs 6.3 bn in Q2FY15 (against our expectation of Rs 6.8 bn) mainly due to
higher than expected provision expenses of Rs 8.1 bn (+21% y-o-y and +3% q-o-q).
Canara bank reported modest loan growth of 11% y-o-y (+3% q-o-q) to Rs 3,109 bn
(as against our expectation of 10% y-o-y growth). However, it reported high deposits
growth of 18% y-o-y (+8% q-o-q) to Rs 4,612 bn (as against our expectation of 12%
y-o-y growth). As a result, investment book grew at a faster pace of 23% y-o-y (+12%
q-o-q) to Rs 1,464 bn as the bank had to park their excess fund in investments due
to lack of enough credit demand in Q2FY15.
On the asset quality front, it continues to show deterioration in Q2FY15 as Gross
NPA and Net NPA increased 25 bps and 28 bps sequentially to 2.92% and 2.31%,
respectively. As a result, Provision Coverage Ratio (PCR) of the bank reduced by 142
bps q-o-q to 58.68%.
Valuation:
Canara Bank’s reported numbers for Q2FY15 were below our expectations.
Deteriorating asset quality, weak earnings trend and pressure on net interest margin
remain key headwinds for Canara Bank. In addition to, lower capital adequacy ratio
(CAR) is also another worry for the bank. However, we will have to wait for the
management commentary on outlook of asset quality and restructuring pipeline
for H2FY15E. At CMP of Rs 411, the stock is trading at P/ABV of 0.8x and 0.8x for
FY15E and FY16E respectively. We have a HOLD rating on the stock with the target
price of Rs 383/-. We will come out with detail report (result update) of Q2FY15
after concall with the management.

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