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Canara Bank (CBK)
Banks/Financial Institutions
Completes the migration with limited impact. Canara Bank completed the last leg
of migration with relatively lesser-than-expected impact on asset quality. Slippages were
at 2.3% (50% migration-related) and the bank has chosen to aggressively write off
these loans resulting in higher provisions. Risks from the infrastructure exposure remain
a key risk, driving our earnings revision. We maintain BUY but believe that near-term
price performance will be muted despite inexpensive valuations of 1X FY2012E book
and 5X FY2012E EPS delivering 6% earnings growth for FY2011-13E and 18% RoEs.
Migration-related hurdle cleared; earnings lower on the back of higher provisions
The bank completed the last leg of migration resulting in slippages of 2.3% with nearly 50%
coming from migration-related exercise. With the migration exercise largely completed, we believe
that the focus would shift to infrastructure exposure (17% of loans) where NPLs or restructuring
are likely to occur in FY2013-14E. We take a cautious approach and build higher loan-loss
provisions (0.8% levels). Canara Bank reported 15% yoy decline in earnings as provisions
increased 250% yoy while NII declined 2% yoy (income de-recognition) on the back of higher
slippages. Healthy growth in non-interest income led by recoveries (doubled yoy) and a stable
operating expenses growth (9% yoy) cushioned the sharp rise in provisions. The bank wrote off
0.8% of loans primarily from these slippages.
Margins expand 22 bps qoq despite de-recognition of interest income
NIMs expanded 22 bps qoq (after reporting a decline of 40 bps in 1QFY12) primarily on the back
of stable cost of funds and loan re-pricing. We note that the impact of higher slippages on NIMs
was about 15 bps for the quarter; unlikely to be repeated at this scale from 3QFY12E. We build 35
bps compression in NIMs for FY2012E and flat margins in FY2013E but believe that a stable cost
environment can result in upward revisions to our current estimates.
Slippages 2.3% for the quarter; aggressive write-off continues
Gross NPLs increased marginally by 5% qoq to `38 bn (1.7% of loans) while net NPLs increased
9% qoq to `31 bn (1.4% of loans). Slippages were high at 2.3% for the quarter. However,
increased in underlying gross NPLs were lower as the bank has made aggressive provisions and
writing off these loans from their portfolio. Loan write-offs were at 0.8% for the quarter while
loan-loss provisions were high at 90 bps. Hence, provision coverage is at 69% (flat qoq) though
coverage ratio (ex write-off) has declined further to 18%, one of the lowest among banks.
Loan growth remained strong at 24% yoy
Loan growth for the quarter was healthy at 24% yoy (similar growth trends for the past
three quarters). Nearly all segments have shown robust growth with retail at 23% yoy,
agriculture at 37% yoy and large corporate at 20% yoy. Infrastructure loan grew 37% yoy
while SME loans grew by 21% yoy. The bank continues to have a relatively higher share of
its loan to fund working capital of SEBs (6% of loans). We are broadly building loan growth
of about 16% CAGR in FY2011-13E for the bank.
Higher recoveries and treasury income boost non-interest income
Non-interest income was at `8.3 bn (decline of 65% yoy) on the back of strong growth in
recoveries and strong treasury income. Income from recoveries doubled to `1.4 bn. Fee
income growth was strong at 17% yoy. The bank reported a treasury gain of `1.5 bn during
the quarter. We expect income from recoveries to remain strong in 2HFY12E due to the
higher slippages reported over the past few quarters.
Other highlights for the quarter
Overall capital adequacy is comfortable at 12.8% with tier-1 capital at 9.2%.
Cost-income ratio was at 42% for the quarter.
Tax rate for the quarter was at 19%—one of the lowest as the bank continues to take
benefit from aggressive write-offs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Canara Bank (CBK)
Banks/Financial Institutions
Completes the migration with limited impact. Canara Bank completed the last leg
of migration with relatively lesser-than-expected impact on asset quality. Slippages were
at 2.3% (50% migration-related) and the bank has chosen to aggressively write off
these loans resulting in higher provisions. Risks from the infrastructure exposure remain
a key risk, driving our earnings revision. We maintain BUY but believe that near-term
price performance will be muted despite inexpensive valuations of 1X FY2012E book
and 5X FY2012E EPS delivering 6% earnings growth for FY2011-13E and 18% RoEs.
Migration-related hurdle cleared; earnings lower on the back of higher provisions
The bank completed the last leg of migration resulting in slippages of 2.3% with nearly 50%
coming from migration-related exercise. With the migration exercise largely completed, we believe
that the focus would shift to infrastructure exposure (17% of loans) where NPLs or restructuring
are likely to occur in FY2013-14E. We take a cautious approach and build higher loan-loss
provisions (0.8% levels). Canara Bank reported 15% yoy decline in earnings as provisions
increased 250% yoy while NII declined 2% yoy (income de-recognition) on the back of higher
slippages. Healthy growth in non-interest income led by recoveries (doubled yoy) and a stable
operating expenses growth (9% yoy) cushioned the sharp rise in provisions. The bank wrote off
0.8% of loans primarily from these slippages.
Margins expand 22 bps qoq despite de-recognition of interest income
NIMs expanded 22 bps qoq (after reporting a decline of 40 bps in 1QFY12) primarily on the back
of stable cost of funds and loan re-pricing. We note that the impact of higher slippages on NIMs
was about 15 bps for the quarter; unlikely to be repeated at this scale from 3QFY12E. We build 35
bps compression in NIMs for FY2012E and flat margins in FY2013E but believe that a stable cost
environment can result in upward revisions to our current estimates.
Slippages 2.3% for the quarter; aggressive write-off continues
Gross NPLs increased marginally by 5% qoq to `38 bn (1.7% of loans) while net NPLs increased
9% qoq to `31 bn (1.4% of loans). Slippages were high at 2.3% for the quarter. However,
increased in underlying gross NPLs were lower as the bank has made aggressive provisions and
writing off these loans from their portfolio. Loan write-offs were at 0.8% for the quarter while
loan-loss provisions were high at 90 bps. Hence, provision coverage is at 69% (flat qoq) though
coverage ratio (ex write-off) has declined further to 18%, one of the lowest among banks.
Loan growth remained strong at 24% yoy
Loan growth for the quarter was healthy at 24% yoy (similar growth trends for the past
three quarters). Nearly all segments have shown robust growth with retail at 23% yoy,
agriculture at 37% yoy and large corporate at 20% yoy. Infrastructure loan grew 37% yoy
while SME loans grew by 21% yoy. The bank continues to have a relatively higher share of
its loan to fund working capital of SEBs (6% of loans). We are broadly building loan growth
of about 16% CAGR in FY2011-13E for the bank.
Higher recoveries and treasury income boost non-interest income
Non-interest income was at `8.3 bn (decline of 65% yoy) on the back of strong growth in
recoveries and strong treasury income. Income from recoveries doubled to `1.4 bn. Fee
income growth was strong at 17% yoy. The bank reported a treasury gain of `1.5 bn during
the quarter. We expect income from recoveries to remain strong in 2HFY12E due to the
higher slippages reported over the past few quarters.
Other highlights for the quarter
Overall capital adequacy is comfortable at 12.8% with tier-1 capital at 9.2%.
Cost-income ratio was at 42% for the quarter.
Tax rate for the quarter was at 19%—one of the lowest as the bank continues to take
benefit from aggressive write-offs.
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