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Core performance disappoints Canara Bank’s (CBK) asset quality fared far better as compared to other PSBs that have declared results so far. Gross stressed additions were lower QoQ at Rs 34bn (vs. Rs 41/40bn in 2/1QFY15). Bank surprised positively by judiciously using high treasury gains (Rs 3bn, 31% of PBT) to drive up the coverage ratio. PCR increased 680bps QoQ to 28.5%. However on the core-operational front, CBK disappointed with (a) flat QoQ NIMs (b) faster capital consumption (c) muted SA deposits accretion and (d) subdued profits. Elevated credit cost (ann. 1.2%) and a high effective tax rate (trend seen in all PSBs result) led to a profit of Rs 6.6bn (+60% YoY, on a very low base), 9% below expectation. Factoring weak 3Q earnings, we cut our PAT estimate by ~3% each for FY16/17E. Despite a better show on the asset quality front, we retain our cautious stance on CBK given (a) high risk of dilution (b) weak deposit franchise & lower productivity and (c) muted return ratios. Further, given the weak commentary from peer banks on asset quality for the next couple of quarters, it seems unlikely that CBK can outperform significantly given its lumpy nature of loans. Maintain Neutral with a revised TP of Rs 440/sh (0.85x FY17 ABV). Negligible write-offs led GNPA (3.35%) to jump 15% QoQ, despite lower slippages. Slippages were down (across segments) by 28% QoQ at Rs 23bn. With sharp improvement in PCR, NNPA (2.4%) rise was restricted to 5% QoQ. CBK restructured loans of Rs 11bn & has a restructuring pipeline of Rs 12bn. O/s std. restructured pool now stands at 6% of loans. We were disappointed by flat QoQ NIM of 2.2% despite yield support coming from lower stressed additions. NIM was muted as surprisingly, cost funds for CBK (unlike other PSBs) inched up by 1bps QoQ to 6.8%. We expect cost of fund to decline 4Q as full benefits of reducing term deposit rates in Dec-14 kicks in. We factored NIM of 2.15% over FY16-17E vs. 2.1% over FY14-15E.
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