Hold Canara bank; target of Rs 390: SPA Securities

SPA Securities' research report on Canara bank

Canara bank reported better NIMs at 2.60% (25bps y-o-y & 4bps q-o-q) led by improvement in C/D ratio 72.2% (462bps y-o-y & 161bps q-o-q). Non-interest income grew 9% y-o-y & -8% q-o-q led by recovery in w/off a/c’s to INR19.3bn. GNPA in absolute terms grew marginally (4% q-o-q) led by reduction in slippages (39% q-o-q) and higher recoveries (55% q-o-q). Controlled opex (8% y-o-y) resulted in higher PPOP (16% y-o-y). However, elevated provisions (36% y-o-y) resulted in lower PAT of 2.6mn (-27% y-o-y).

Outlook

Recapitalization plan by the government is big positive for all PSBs over the longer run. However, consolidation of PSBs will bring uncertainty in the earnings for PSBs going ahead. We expect Canara bank to report high credit cost going ahead which will adversely impact the earnings and keep return ratios subdued over the next 3-4 quarters. Faster resolution of stress assets remain a key monitor able. Given the weak operating environment, we would like to wait and watch the developments of the bank in terms of asset quality and credit growth going ahead. We maintain our HOLD rating on the stock with a revised TP of INR 390 (INR 319 earlier) based on SOTP (0.6x P/BV for the bank & INR 17 per share for other investments).