Buy Canara Bank; target of Rs 650: Sushil Finance

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Buy Canara Bank; target of Rs 650: Sushil Finance

Sushil Finance is bullish on Canara Bank and has recommended buy rating on the stock with a target of Rs 650 in its November 15, 2011 research report.

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Sushil Finance is bullish on Canara Bank and has recommended buy rating on the stock with a target of Rs 650 in its November 15, 2011 research report.

"Canara Bank, in the last 5 years, has grown its business at a CAGR of 17% & APAT at a CAGR of 21% with high ROE of +20% and sound asset quality. However, in light of challenging credit offtake conditions & increasing cost of funds, there has been a sharp slide in its NIMs during H1FY12 along with higher slippages (especially impacted by migration to 100% system based NPA recognition) & high investments provision (due to increased bond yields). Considering these factors and outlook for H2FY12, we have reduced our business & NII growth estimates for FY12 & FY13. We now expect its Advance & Deposit to grow by 17.4% & 16.9% in FY12E and 17.1% & 16.2% in FY13E, while its Net Profit to shrink by 17% in FY12E but grow by 26% in FY13E. The Bank currently trades at an attractive valuation of 0.9x FY13E ABV & 4.9x FY13E Earnings."

"During Q2FY12, NII declined marginally by 2% YoY and stood at Rs.19.61 bn. Its NIMs fell by 64 bps YoY due to interest income reversal of Rs.1.2 bn (Interest income on Agri loan reversed on migration to system based NPA recognition norms) and higher cost of retail as well as bulk deposits. The Bank saw a decent growth of 24% YoY in its Advances & 25% YoY growth in Deposits. Its term deposits grew by 34% YoY while CASA grew by 12% YoY. CASA's share in total deposits declined by 305 bps YoY but was stable sequentially, now forming 25.8% of its total deposits."

"The Bank's non interest income saw a robust growth of 66% YoY on higher treasury income (Rs.1490 mn in Q2FY12 as against Rs.15.8 mn in Q2FY11) while recoveries from written off accounts saw a strong growth of 108% YoY. Its operating expenses were largely contained with marginal increase of 9% YoY, mainly due to slower growth in employee expenses (5% YoY increase). As a result of a fall in its NII, its Cost to Income ratio stood at 44.9% in Q2FY12 as compared to 43.5% in Q2FY11. Its operating profit grew by 13% YoY and stood at Rs.16.1 bn. The Bank's total provisions in Q2FY12 increased by 250% YoY to Rs.5.53 bn, largely on account of higher provisions on investment depreciation (Rs.4.7 bn in Q2FY12 as against Rs.2.1 bn in Q2FY11) and higher provision on fresh bad loans, as a result of which the Bank's net profit saw a de- growth of 15% and stood at Rs.8.52 bn for Q2FY12. The Bank has opened 180 branches & 407 ATMs in H1FY12, taking its reach to 3437 branches & 2623 ATMS. It plans to open more than 300 branches and increase ATMs strength to 3000 in FY12."

"We believe the stock can trade at 1.3x P/ABV given its wide branch network, strong deposit franchise, decent assest quality & sustainable +18% ROE. We change our rating to "BUY" with a reduced price target of Rs 650," says Sushil Finance research report.

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To read the full report click on the attachment