BackCanara Bank improves asset quality in March quarter
Gross non-performing assets decline to 2.49% at the end of March, 30 basis points lower from three months earlier
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Canara Bank Ltd shares rallied 6.5% on Monday after it reported an improvement in asset quality and strong growth in net interest income. Total bad loans fell sequentially for the first time in 4 years as the bank focused on cash recovery and sold some bad loans to asset reconstruction companies.
Gross non-performing assets (NPAs) as a proportion of total loans declined to 2.49% at the end of March, 30 basis points lower from three months earlier. One basis point is one-hundredth of a percentage point. However, slippages haven’t shown any sign of bottoming out. Fresh additions to bad loans were slightly higher at ₹ 2,135 crore compared with ₹ 2,100 crore for the December quarter. Therefore, it took recoveries and upgradations of ₹ 2,243 crore to chip away at the bad loans.
Secondly, although the bank recast only ₹ 1,432 crore in the three months to March compared with ₹ 3,454 crore in the December quarter, restructured advances as a percentage of gross advances remain elevated at around 7.06%.
Restructuring was concentrated in sectors most affected by fragile economic growth such as power, iron and steel, textiles and aviation. The bank’s exposure to the infrastructure sector has grown by almost one-fifth from a year ago. It also has a substantial exposure (about 12.7%) to the power sector, which is a worry given the structural issues facing the sector.
Restructuring is set to continue with another 12 accounts worth ₹ 3,400 crore earmarked to be recast over the next two to three quarters, the management said in a conference call. IVRCL Ltd alone makes up for half the restructuring pipeline, it added.
The other positive in the Canara Bank earnings was the strong growth in its loan book of 24.3% trumping industry growth. That was owing to the bank focussing on retail credit, which grew 45% from a year ago, and the micro and small enterprise book, which grew 38%. However, this growth needs to be viewed with a bit of caution given the state of the economy.
The micro and small enterprise segment has a bad loan ratio of 4.71%, although it needs to be noted that slippages had come down in this segment in the March quarter. In retail credit, while housing and vehicle loans—typically secured products—make up a majority of the book, there is ₹ 5,845 crore marked as “other personal loans", about which details are not known.
These are just a couple of numbers investors should track even as the management has expressed confidence that it will bring down bad loans to 2% of the loan book by the end of this fiscal. Trading at half their estimated book value for fiscal 2015, Canara Bank shares do look attractive, although analysts caution that the bank will require capital to maintain this pace of loan book growth. The bank itself is looking to raise ₹ 1,500 crore, a move which might keep the stock price under pressure.
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