Canara Bank reported a 49% y-o-y decline in net profit in Q1 to Rs1.22 billion on account of a 3% fall in other income and 80% rise in provisioning requirements to Rs5.4 billion.
MTM hit of close to Rs4 billion on its investment book overshadowed the NII growth of 14% y-o-y and 10% q-o-q. NIM expanded by almost 15 bps on a sequential basis to 2.57%. Credit growth for the bank was modest at 16% while deposits grew only 9% y-o-y.
With overall deposits growing at much lower rate and higher focus on low cost deposits, CASA improved by 3.85% to Rs34.16% in Q1. The expansion was noticeable on a sequential basis as well with CASA at 31.5% as on March 08.
The bank managed to report a 26% growth in fee based income (mostly CEB income) to Rs3.48 billion. With over 76% of the business covered under CBS as on June’08, fee income growth for the bank is expected to improve going forward.
We have reduced the earnings estimates for FY09 by 13% based on high MTM losses and to account for higher interest rate environment and slower-than-expected earnings progression.
While improvement in NIM is encouraging, slower growth in credit and deposits remain a concern, we have also reduced our price target by around 15%. Valuations though remain cheap at 0.7x FY09E BV and 4.5x FY09E earnings. We are downgrading the stock to sector NEUTRAL.