Canara Bank’s net profit for FY09 grew by 32.4% y-o-y to Rs 20.7 billion, driven by a 33.4% rise in the net interest income (NII).
The advances grew by 28.9% y-o-y for FY09, and by 7.2% sequentially, largely driven by loans to infrastructure, MSMEs and industrial sectors.
During the quarter the Bank, in our view, de-risked its balance-sheet and consequently improved its tier 1 capital adequacy. This led us to increase our growth rates for advances.
We estimate a growth of 5-6% for Q1’10 and of ~21% for FY10. The loan book should get a boost due to the emphasis on retail-housing and auto loans.
To promote retail housing loans the Bank has entered the ongoing price-competition; while for auto, it has tied-up with various auto-makers.
The Net Interest Margin (NIM) increased by 3bps q-o-q to 2.78%. With the addition of 200 branches through FY10, we expect the CASA to improve and negatively impact the cost of borrowing.
We anticipate that pressure exerted by a sharp reduction in the PLR along with a large amount of sub-PLR lending is likely to tighten the NIM. Therefore, we estimate the NIM for Q1’10 at ~2.65%.
We have valued Canara Bank by using the three-stage Discounted Equity Cash Flow (DECF) model. Assuming a 6.97% terminal growth rate and a 17.12% cost of equity, we have arrived at a fair value estimate of Rs. 270.
This indicates a potential upside of 25% over the current market price of Rs.216.20.
We see limited downside, even in view of the potential near-term negatives, and therefore, reiterate our BUY rating.