Buy Canara Bank; target of Rs 230: Emkay Global Financial

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Emkay Global Financial’s report on Canara Bank

Despite moderate credit growth of 6% yoy and soft NIMs, Canara Bank reported a strong beat on PAT at Rs13.3bn vs. our estimate of Rs8.8bn, mainly helped by higher treasury income, contained provisions and cash recovery from DHFL. Higher-than-expected slippages of Rs69bn/4.5% of loans came in as an irritant, but they included the lumpy SREI Group (Rs32bn) for which the bank has made a 50% provision. However, higher recoveries/upgrades led to a marginal reduction in GNPA to 8.4%. The restructured pool was down to Rs181bn/2.9% of loans, with no further pipeline. The bank has guided for 7-8% loan growth and lower slippages of ~1.7-1.8% in FY22, which, coupled with the transfer of NPAs to NARCL, should lead to a further reduction in GNPAs. Specific PCR now stands healthy at 64%, which otherwise was a long-time issue. After the recent QIP/DTA adjustment, the CET 1 ratio stands at a reasonable 10.1%.

Outlook

In our view, merger/asset-quality related concerns are largely behind us, and the bank should report a gradual improvement in its RoA/RoE to 0.4-0.6%/9-13% over FY22-24E from 0.3%/6% in FY21. Retain Buy with a revised Dec’22 TP of Rs230 (Rs185 earlier), factoring in better return ratios and thus multiple upgrade (0.6x vs. 0.5x previously).

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