Hold Canara Bank; target of Rs 340: KRChoksey

KRChoksey report on Canara Bank

"Canara Bank reported PAT of Rs 613 crs, flat Y-o-Y and a decline of 6.6% Q-o-Q owing to margin pressure, high costs and increased asset quality stress. Key highlights: 1) NII declined by 1.9% Y-o-Y and increased by 4.4% Q-o-Q due to modest loan book growth and pressurized margins 2) Healthy non-interest income supported earnings, which grew by 23.9% Y-o-Y and 12.7% Q-o-Q, mainly driven by huge trading gains (Rs 509 cr in Q4FY15 vs Rs 301 in Q3FY15) and sequentially healthy fee income growth 3) Operating expenses grew by 20.7% Y-o-Y and 18.2% Q-o-Q owing to high branch expansion 4) Provisions declined by 7.5% Y-o-Y and grew by 20.0% Q-o-Q due to lower provisioning on a Y-o-Y basis, while a positive depreciation on investments during Q4FY15 (Rs 16 crs) vs a write back in Q3FY15 (Rs 236 crs) increased led to the sequential increase 5) The bank restructured loans amounting to Rs 3,473 crs up from Rs 1,094 crs in the previous quarter as RBI’s restructuring norms roll-out. Overall restructured assets stand now at 8.6% one of the highest in peer banks 6) Gross and Net NPA ratios stood at 3.9% and 2.7% respectively with coverage ratio 57.3% (including technical write offs) 7) Advances and deposits growth stood at 9.6% Y-o-Y and 12.6% Y-o-Y respectively."

"Core metrics remain on a weak note with deteriorating asset quality, pressurized margins, high opex and slow loan growth. We believe a pickup in investment cycle, diversification of loan book, strong fee income growth and an improvement in margins would be key factors to watch out for. Given the subdued RoE, we think stock is fairly valued, currently trading at 1.0x FY17 ABV and 5.2x FY17 earnings. We recommend “HOLD” on the stock with a target price of 340", says KRChoksey research report.

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