Canara Bank : Strong quarter; NIM expansion is a key positive. ADD says Kotak Sec

Visit http://indiaer.blogspot.com/ for complete details 􀂄 􀂄


Canara Bank (CBK)
Banks/Financial Institutions
Strong quarter; NIM expansion is a key positive. Canara Bank reported yet another
strong quarter driven by strong expansion of NIM and lower loan loss provisions. NIMs
improved 17 bps qoq at 3.2% due to stable funding costs and better lending yields.
Asset quality was stable resulting in lower-than-expected provisions. We are impressed
by the margin trend of the bank and have revised earnings by 10% upwards in
FY2011E and 5% in FY2012E. The stock is currently trading at 1.4X FY2012 PBR.
Retain ADD with a TP of `740.



NIM at 3.2% led by stable funding costs and higher lending yields; loans up 20%
Canara Bank’s net interest income (NII) for 2QFY11 was `20 bn (up 53% yoy), 18% higher than
estimates driven by stable funding costs and better lending yields. NIMs improved further by 17
bps yoy to 3.18% in 2QFY11 (3.01% reported in 1QFY11). The bank reported loans at Rs1.76 tn
(up 20% yoy) and deposits were Rs2.49 tn (up 22% yoy) as of September 2010. Infrastructure
loans grew 63% yoy while retail loans grew 26% yoy driven by housing which grew 42% yoy.
CASA deposits grew by 23% yoy and are 29% of deposits (unchanged qoq). We are factoring
loan book growth at 19% CAGR for FY2010-12E and NIMs to decline by 10 bps by FY2012E.

Asset quality stable with provision coverage (including write-offs) at 77%
Gross NPLs were stable qoq at `26.4 bn (1.5% of loans) while net NPLs increased 10% qoq to
`18.6 bn (1.1%). Provision coverage (ex write-off) declined to 30% compared to 32% in June
2010. Adjusting for technical write-off, the overall provision coverage ratio for the bank was
healthy at 77% for the quarter. The company continues to maintain a policy of writing off stressed
loans, allowing it a lower effective tax rate (2QFY11 was at 20% similar to 1QFY11). The lower
slippages in loans resulted in lower loan loss provisions. Loan loss provisions were at 0.5% for the
quarter compared to 1% provision made in FY2010. While we see the lower-than-expected
provisions as positive, we would continue to remain cautious and build higher provisions till
FY2012E as slippages from corporate NPLs could be lumpy in nature.

Muted performance on non-interest income
Canara Bank’s non-interest income was at `5 bn (down 44% yoy) in 2QFY11 mainly due to lower
treasury gains. Treasury gains were `20 mn against `4.4 bn in 1QFY11. Core fee income growth
continues to remain under pressure growing only by 12% yoy. Income from recoveries was lower
during the quarter at `650 mn compared to `719 mn in September 2010. We are modeling a
13% CAGR in core fee income in FY2010-13E.