Reduce Canara Bank; target of Rs 380: Emkay

Emkay Global Financial Services is bearish on Canara Bank and has recommended reduce rating on the stock with a target of Rs 380 in its November 7, 2012 research report.

“Canara Bank Q2FY13 NII came in slightly better than expectation at Rs19.6bn (-0.2% yoy), however, with lower other income net profit was below expectation at Rs6.6bn. Higher investments books compensated for the lower loan growth and hence the NII was better than expected. Other income was lower at Rs6.1bn led by 16%/ 14% yoy decline in fee income and forex gains respectively. Provisions remain elevated at Rs4.2bn led by higher slippages and restructuring during the quarter.”

“Addition to stressed assets remains steep with fresh slippages/ restructuring of Rs19.2/ Rs6.1bn, together constituting 1.2% of advances. Slippages include five large corporate accounts together constituting Rs12.5bn. Cumulative restructured assets now stands at 6.9% of advances. With just 35% provisioning on incremental net slippages, PCR continue to languish at lower 18.6%. While advance book remain flat (-4.4%qoq) yoy at Rs2.2tn, deposit grew by a higher 8%yoy (0.6%qoq). Resultantly LDR declined to 64.1% from 67.4% in previous quarter. CASA proportion improved to 24.8% from 23.3% in previous quarter.”

“While the bank has been able to deliver slightly better on the NII front, it was largely driven by higher interest income on investment. We believe with pressure on the bank to reduce its bulk deposits from ~35% odd levels to the required 15%, will restrict the advance growth to 10%/14% for FY13/14%. With lower advance growth fee income related to advances will also get impacted, as was seen during the quarter. Moreover on the asset quality side also the bank has been consistently reporting higher slippages for the last seven quarters, with average slippage rate in excess of 2.5%. However with inadequate provisioning the PCR has come down from already low levels of 28% in Q3FY11 to just 18.6% now. We believe the continued deterioration in asset quality will keep the provision requirement at elevated levels. With lower NIM’s of 2%(calculated), falling other income and higher provisioning cost, ROA are likely to remain at sub optimal levels of 0.7% each for FY13/FY14. At CMP the stock trades at 1x/0.9x FY13/FY14 ABV respectively. Maintain reduce with TP of Rs380,” says Emkay Global Financial Services research report.

Public holding more than 90% in Indian cos

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