Canara Bank | Q3FY15 | Asset quality deteriorates further, albeit, at a slower pace as compared to last two quarters; await more details on quality of assets :: IndiaNivesh

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Net Interest Income (NII) of Canara Bank increased at 7% y-o-y (+1% q-o-q) to Rs 23.8 bn (our estimate: Rs 24.1 bn) in Q3FY15. Interest income grew at 10% y-o-y to Rs 110.5 bn whereas interest expense also grew at a similar pace of 10% y-o-y to Rs 86.7 bn. CANARA Bank’s Non-Interest Income increased at 38% y-o-y (+15% q-o-q) to Rs 23.8 bn. With high proportion of AFS book, we expect this growth might be led by robust growth in treasury income as yields on G-Secs have come off by 40-50 bps in Q3FY15. Operating expenses increased 18% y-o-y (muted q-o-q) to Rs 17.6 bn mainly led by 19% y-o-y increase in employee cost. Pre Provisioning Profit (PPP) increased 13% y-o-y (+11% q-o-q) to Rs 18.0 bn, (our estimate: Rs 17.9 bn) helped by healthy growth in other income. Provisions increased at 3% q-o-q (-20% y-o-y) to Rs 8.4 bn (our estimate: Rs 8.0 bn). Provision expenses were higher than our expectation. However, the y-o-y decline in provisions was mainly because the bank has made substantially higher provisions in Q3FY14 (cushion provided by additional provision of Rs 1.6 bn on investment depreciation). As a result, Net profit of Canara Bank was below our expectation which increased 60% y-o-y (+5% q-o-q) to Rs 6.6 bn (our estimate: Rs 7.3 bn) in Q3FY15. Advances grew at 9% y-o-y (muted q-o-q) to Rs 3,123 bn. Deposits grew at a faster pace of 13% y-o-y (+muted q-o-q) to Rs 4,624 bn. The asset quality deteriorated further as Gross NPA and Net NPA increased 43 bps / 11 bps sequentially and they stood at 3.4% and 2.4%, respectively. However, increase in provisions helped the bank to improve its Provision Coverage Ratio (PCR) by 76 bps q-o-q and it stood at 59.4% as of Q3FY15. CANARA Bank added fresh slippages of Rs 23 bn as compared to Rs 32 bn in Q2FY15 (Rs 26 bn in Q1FY14). We will have to wait for the more details on assets restructured during Q3FY15 and pipeline for the next quarter. Valuation: Canara Bank’s reported numbers were in-line with our expectations except on PAT level. Deteriorating asset quality, weak earnings trend and pressure on net interest margin remained 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 Q4FY15E. At CMP of Rs 454, the stock is trading at P/ABV of 0.9x and 0.9x for FY15E and FY16E respectively. Prior to the result we had a HOLD rating on the stock with the target price of Rs 383/-. We will come out with detail report (result update) of Q3FY15 after a concall with the management till then we put our rating/target under review (UR).

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