Canara Bank Ltd NII growth surprises:: Religare Research

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Canara Bank Ltd
NII growth surprises
Canara Bank’s (CBK) Q2FY11 results were above our estimates due to betterthan-
expected interest margins. While loan book grew 1.3% QoQ (20% YoY),
NII increased 16% QoQ supported by a 15bps sequential improvement in
NIMs to 3.16%. Higher yield on advances (due to re-pricing of loan book) and
stable cost of deposits led the margin expansion. Other income declined 44%
YoY primarily due to negligible trading profits in Q2FY11 (as against a trading
profit of Rs 4.4bn booked in Q2FY10). Asset quality remained healthy with
gross NPA stable at 1.5%.
We are upgrading our earnings estimates by 8.1/6.4% for FY11/ FY12 to factor
in the higher-than-expected margins. While H1FY11 results have surprised us
positively, we note that the trend in the bank’s quarterly performance has been
volatile. Reported ROE are amongst the highest in the PSU Banking space,
however, these returns are, to an extent, inflated by lower tax rates, high
leverage and large contribution from trading gains. We maintain a HOLD on
the stock with a target price of Rs 650.
Advances grow in line with industry; NIMs improve to 3.16%: Advances grew by
20% YoY driven by the infrastructure and retail segments (Fig 3). Loans to the
infrastructure segment grew 63% YoY, increasing the proportion of these loans to
~22% of the total loan book as against 17% in Q2FY10. Deposits grew by 21.5%
and CASA proportion remained largely stable at ~29%. Yield on advances
improved by 26 bps QoQ in Q2FY11 due to re-pricing benefit on the asset side
whereas cost of funds remained largely stable. Consequently, NIMs expanded
15bps QoQ to 3.16%. We are upgrading our NII estimates by 4.9/5.2% for
FY11/FY12 to factor in the better-than-estimated NIMs.
Core fee income growth muted; C/I ratio increases to 43%: Total non-interest
income declined sharply YoY and QoQ due to negligible trading profits of
Rs 16mn in Q2FY11 (vis-à-vis Rs 4.4bn in Q2FY10 and Rs 2.2bn in Q1FY11).
Other income (ex-treasury) grew by just 9% YoY as growth in core commission
income was subdued at 12% YoY. Operating expenses increased by 24% YoY
due to a 32% YoY growth in staff expenses. Consequently, C/I ratio increased to
43.4% in Q2FY11 (from 39.8% in Q2FY10 and 39.7% in Q1FY11).
Asset quality remains stable: Asset quality was maintained during the quarter,
with GNPA and NNPA increasing by a marginal 3bps QoQ and 6bps QoQ to
1.49% and 1.06% respectively. The bank’s total provision coverage stood at 77%
(including technical write-offs) as against 70% required by RBI.