Buy Canara Bank; target of Rs 410: LKP Research

LKP Research's research report on Canara Bank

Canara Bank has been reporting consistent growth in net profit since previous twelve quarters. In 1QFY24, the profitability increased by 75% YoY and 11.3% sequentially on the back of lower provisioning expenses. A bulky provision (₹54bn) made in 4QFY20 (three years ago), continued to safeguard the balance sheet from delinquencies from restructuring with PCR (calculated) of 70.6% and PCR (including TWO) of 88%. On asset quality front, the GNPA/NNPA ratio (5.15%/1.57%) improved by 20bps and 16bps respectively on the back of stable slippages of ₹32bn. The slippages ratio (reported) marginally down at 34bps v/s 35bps in the previous quarter. The cumulative SMA1/2 book also stable at 39bps/38bps of loan book. On the business front, the bank has reported healthy gross credit growth of 13.3% YoY and 2.9% sequentially. The bank’s recoveries are in line with the guidance and expect the credit cost to be below 2% for FY24. Furthermore, the NIMs have expanded by 10bps sequentially to 3.05%. We believe the bank is growing the balance sheet with welladjusted margins and it is expected to bode well. We believe the bank has recovered well and is expected to witness gradual improvement in profitability with FY24E ROA/ROE of 1%/17.5%. With an inexpensive valuation (0.8x PBVPS) we recommend BUY.

Outlook

We expect the bank’s loan book to fatten cautiously at CAGR of ~15% over FY23-25E, led by RAM and corporate book growth. In our opinion, the bank’s credit cost shall normalise further by FY24E and estimate return ratio ROA/ROE of 1% and 17.5% in FY24E. We value the standalone entity at 0.7xFY25E BVPS (₹586) and arrive at a target price of ₹410. We recommend BUY with a potential upside of 22%.