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Canara Bank posted core 4QFY11 earnings below our forecasts. NIMs will likely come under
further pressure given a relatively high reliance on wholesale funds. Slippages are high, but
the bank has consistently been able to recover a chunk of bad loans, offering some comfort
on asset quality. Buy maintained.
4QFY11: NII below our forecasts; higher recovery from written off accounts
4QFY11 net interest income (NII) rose 24% yoy (down 7% qoq) on 26% yoy loan growth (up
12% qoq). The net interest margin (NIM) fell about 25-30bp qoq to 3.0% in 4QFY11. Noninterest
income was boosted by higher recovery from written-off accounts (Rs3.3bn in
4QFY11). The second pension option liability is Rs23.7bn: Rs5.2bn of which pertains to
retired employees and was charged off in FY11. Of the remaining Rs18.5bn, pertaining to
existing employees, the bank provided Rs3.7bn (one-fifth) in FY11. The gratuity liability was
Rs6.8bn, of which Rs1.4bn (one-fifth) was provisioned for in FY11. Slippages rose qoq to
110bp of loans (on a one-year lag basis) in 4QFY11, partly on account of a transition to a
system-based NPL recognition system (for accounts exceeding Rs1m).
Margins to remain under pressure
Reported NIMs rose 32bp yoy to 3.12% in FY11. Bulk deposits and certificate of deposits
were 24% of total deposits as of March 2011. We expect this to keep NIMs under pressure
given the current interest rate environment. We factor in a 12bp yoy decline in NIMs for
FY12F. We note that the bank raised equity in 4QFY11 and this should aid margins in FY12.
Higher slippage ratio, but higher recoveries too
Slippages were 180bp of average loans in FY11 vs 210bp of loans in FY10. However, cash
recovery in FY11 was Rs22.6bn (Rs17bn cash recovery from GNPLs + Rs5.6bn recovery from
written-off accounts), which was about 87% of opening GNPLs of around Rs26bn as of April
2010. Total cash recovery as a proportion of opening gross NPLs was 73% in FY10 and about
100% in FY09. Management expects the buoyancy in cash recovery to continue in FY12. The
proportion of total stressed loans, at about 5% (1.4% GNPLs + 3.5% restructured loans), is
largely in line with that of peers.
Changes in our forecasts; we maintain Buy
We increase our FY12-13F net profit forecasts 8-9% on better-than-expected asset growth in
FY11. However, the increase in earnings does not fully translate to higher EPS, due to equity
dilution. Buy maintained, with a revised TP of Rs658. The reduction in our TP is due to lower
average ROEs over FY12-14F due to inclusion of our FY14 forecasts.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Canara Bank posted core 4QFY11 earnings below our forecasts. NIMs will likely come under
further pressure given a relatively high reliance on wholesale funds. Slippages are high, but
the bank has consistently been able to recover a chunk of bad loans, offering some comfort
on asset quality. Buy maintained.
4QFY11: NII below our forecasts; higher recovery from written off accounts
4QFY11 net interest income (NII) rose 24% yoy (down 7% qoq) on 26% yoy loan growth (up
12% qoq). The net interest margin (NIM) fell about 25-30bp qoq to 3.0% in 4QFY11. Noninterest
income was boosted by higher recovery from written-off accounts (Rs3.3bn in
4QFY11). The second pension option liability is Rs23.7bn: Rs5.2bn of which pertains to
retired employees and was charged off in FY11. Of the remaining Rs18.5bn, pertaining to
existing employees, the bank provided Rs3.7bn (one-fifth) in FY11. The gratuity liability was
Rs6.8bn, of which Rs1.4bn (one-fifth) was provisioned for in FY11. Slippages rose qoq to
110bp of loans (on a one-year lag basis) in 4QFY11, partly on account of a transition to a
system-based NPL recognition system (for accounts exceeding Rs1m).
Margins to remain under pressure
Reported NIMs rose 32bp yoy to 3.12% in FY11. Bulk deposits and certificate of deposits
were 24% of total deposits as of March 2011. We expect this to keep NIMs under pressure
given the current interest rate environment. We factor in a 12bp yoy decline in NIMs for
FY12F. We note that the bank raised equity in 4QFY11 and this should aid margins in FY12.
Higher slippage ratio, but higher recoveries too
Slippages were 180bp of average loans in FY11 vs 210bp of loans in FY10. However, cash
recovery in FY11 was Rs22.6bn (Rs17bn cash recovery from GNPLs + Rs5.6bn recovery from
written-off accounts), which was about 87% of opening GNPLs of around Rs26bn as of April
2010. Total cash recovery as a proportion of opening gross NPLs was 73% in FY10 and about
100% in FY09. Management expects the buoyancy in cash recovery to continue in FY12. The
proportion of total stressed loans, at about 5% (1.4% GNPLs + 3.5% restructured loans), is
largely in line with that of peers.
Changes in our forecasts; we maintain Buy
We increase our FY12-13F net profit forecasts 8-9% on better-than-expected asset growth in
FY11. However, the increase in earnings does not fully translate to higher EPS, due to equity
dilution. Buy maintained, with a revised TP of Rs658. The reduction in our TP is due to lower
average ROEs over FY12-14F due to inclusion of our FY14 forecasts.
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