Buy Canara Bank; target of Rs 330: Emkay Global Financial

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Emkay Global Financial' research report on Canara Bank

Canara Bank posted a strong beat on PAT at Rs25.3bn (our est: Rs20.3bn), mainly driven by margin improvement and lower tax, albeit partly offset by the prudent higher provisions for shoring-up its specific PCR. Bank has shifted to a new tax regime post adjusting for the DTA which should keep tax rate below 25% in H2FY23 and continue boosting profitability. Credit growth surprised positively by 21% YoY/6% QoQ, on strong corporate & retail loan traction. Deposit growth remains moderate, as seen across peers, leading to better LDR. This, coupled with higher interest spreads, led to an 8-bps improvement in NIM to 2.86%. Bank guides for decent double-digit credit growth and NIM of around 2.9%, leading to healthy core-profitability, although likely to partly offset the treasury hit expected in Q3 Fresh slippages were elevated, but headline GNPA ratio sharply declined by 61bps QoQ to 6.4% due to strong recovery/w-offs. The restructured book, too, witnessed a severe fall, by 42bps to 2.1%. With the NARCL transfer around the corner, the bank expects NPAs to further trend down. Benefiting from the strong profitability/DTA adjustment, CET improved to 11.1%, but higher growth would call for a capital raise in the next 12-15 months.

Outlook

We meaningfully raise our earnings estimates by 22-27% over FY23-25, factoring-in the higher credit growth/margin and lower tax rate. We now expect RoA/RoE to improve to 0.9%/17% by FY25E (without considering capital raise). We retain BUY on the stock, with revised TP of Rs330/share, based on 0.7x FY24E ABV and subsidiary/investment value of Rs23. Key risks: MD change in Dec-22, higher run-up in G-Sec yields hurting treasury performance, and macro dislocation leading to stress in the SME book.

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Canara Bank - 211022 - emkay