Significant exposure to NBFCs (12% of loans) and very high NPAs under infra credit (15.5%) will add to burden. Maintain ‘add’ rating TP unchanged at Rs 270.
Canara Bank’s Q1FY20 PAT was lower than expected at Rs 330 crore (up 17% y-o-y) primarily on a lower NII growth (down 16.5% y-o-y). Slippages remained elevated at Rs 3,680 crore (3.8% of loans in Q1FY20 vs 2.6% in Q4FY19); however, headline asset quality remained stable with GNPA/ NNPA at 8.8%/5.4% with a PCR of 41% (69% including tech write-offs). Loan growth was healthy at 12% y-o-y, but low capital base (CET I at 8.2%) along with weak profitability will remain an overhang. Capital raising at current levels will be EPS dilutive and will keep RoE suppressed for longer period.
Significant exposure to NBFCs (12% of loans) and very high NPAs under infra credit (15.5%) will add to burden. Maintain ‘add’ rating TP unchanged at Rs 270. Stock trades at 0.8x FY21E P/ABV.
(a) Loan growth at 12% y-o-y primarily driven by domestic book while, overseas loans just grew 6.1% YoY; (b) retail book — non-priority (22.7% y-o-y) and non-retail agri (up 13.1% y-o-y) were the key growth drivers of domestic book; (c) within retail, vehicle (40.4% y-o-y); other personal loan (39.3% y-o-y) and housing (20.4% y-o-y) contributed the most; (d) CASA declined 129 bps q-o-q to 27.9% led by 6.4%/2.4% q-o-q run-off in both CA and SA deposits — a typical Q1 phenomenon; (e) despite a sharp 28 bps q-o-q decline in yields, margin remained stable at 2.3% supported by a 32 bps q-o-q decline in cost of funds; and (f) slippages were largely led by MSME and agriculture book.
Ability to raise fresh capital, unlocking value from non-core assets and moderation in slippages are the key challenges. However, stabilising growth rates with decreasing share of overseas business, ample room to redeploy resources, significant share of PSL loans (generate additional income) and upward reprising of assets (yield on advances at 8.16%) along with cheap valuations make us retain ‘add’ rating. At CMP, it trades at 0.9x/0.7x FY20E/FY21E ABV (excluding value of subsidiaries). Value unlocking from non-core investments will provide upside risk to our estimates/TP.