Sharekhan maintains BUY on Canara Bank

Sharekhan maintains BUY on Canara Bank

Canara Bank’s bottom line growth of 31.8% to Rs529.4 crore in Q2FY09 was above our expectation. Better-than-expected margins and lower-than-expected provisions primarily drove this.

The net interest income (NII) growth was healthy at 46% y-o-y to Rs1,149 crore on the back of an improvement in the margins coupled with a pick-up in the credit growth.

The Q2FY09’s reported net interest margin (NIM; 2.7%) indicates an expansion of 34 basis points y-o-y. The non-interest income declined by 40.8% to Rs338.8 crore owing to weak treasury performance.

The advances growth picked up during the quarter and stood at 25.1%. Though largely in line with the industry level growth rate of ~26%, the advances growth during the quarter is better than 16% growth during the previous quarter.

On the deposit front, the current and savings account (CASA) balances registered a healthy growth of 19.6% y-o-y, while the term deposits grew by 17.4% y-o-y, leading to a marginal year-on-year (y-o-y) improvement in the CASA ratio to 32%. Sequentially, the CASA ratio has dipped by 220 basis points.

The operating expenses were largely flat at Rs714.2 crore on the back of a 2.4% decline in the staff expenses, which helped offset a 5.8% growth in the other expenses. Notably, the provisions declined by 19.4% to Rs144.1 crore, as the bank wrote-back Rs6 crore out of Rs400 crore marked-to-market (MTM) provisions made during Q1FY2009.

The gross non-performing assets (GNPA) were largely stable yoy at Rs1,573.9 crore, while the net non-performing assets (NNPA) increased by 12.5% to Rs1,065 crore.

The capital adequacy ratio (CAR) was healthy at 13.21% as at the end of September 2008, though marginally down from the year-ago level of 13.89%.

In line with the higher-than-expected margins and business growth, we are revising our estimates upwards by 4.63% for FY09 and 10.4% for FY10.

At the current market price, Canara Bank trades at 4.2x 2009E earnings per share (EPS), 2.2x 2009E pre-provisioning profit (PPP) and 0.8x 2009E adjusted book value. We maintain our BUY recommendation and price target of Rs234.