Markets
Upcoming provision rules cast shadow over Canara Bank outlook
Summary
In fourth quarter, Canara Bank’s loans grew 18% year-on-year (y-o-y), but deposit growth was slower at 9%.New Delhi: Canara Bank Ltd investors are nervous. The spectre of the potential impact of Expected Credit Loss (ECL) norms is a cause of concern even as March quarter (Q4FY23) results, announced on Monday, were largely in-line.
In the earnings call, the bank’s management said it has assessed about ₹42,000 crore ECL provisioning over five years, which comes to around ₹8,000-8,500 crore a year. This is based on the Reserve Bank of India’s (RBI) draft ECL guidelines. Some analysts reckon the estimated amount is higher. Note that higher provisioning could hit the bank’s return ratios. Another concern is that if these norms are implemented, it may warrant capital dilution in the near term.
“The announcement from Canara Bank management that it would have to make 4-5% of loan-loss provisions to comply with the ECL transition has come at an unexpected time, as the work on the transition is yet to be announced by the regulator," a Kotak Institutional Equities report said.
In January, the RBI had issued a draft paper on ECL norms. Under this, banks will have to classify loans under three categories--Stage 1, Stage 2, and Stage 3, depending upon the assessed credit losses and accordingly make provisions. “Within SoE (state owned entities) banks we cover, we see a relatively greater impact on Canara and Punjab National Bank: We cite: 1) relatively lower coverage ratios, 2) relatively higher gross and net NPL formation and credit costs historically, and 3) relatively lower capital ratios," said a Morgan Stanley report dated 10 May, on ECL norms.
Meanwhile, in Q4, Canara Bank’s loans grew 18% year-on-year (y-o-y), but deposit growth was slower at 9%. The management expects moderation in FY24 and has given a credit growth guidance of 10.5%. Net interest margin is seen at 3.05% in FY24 versus 2.95% in FY23. Repricing of MCLR loans (about 49% of the loan book) is expected to offset the rise in the cost of funds.
To be sure, Canara Bank’s investors are sitting on handsome returns of nearly 51% in the last one year. The way ahead could be rough, especially with ECL concerns looming. So far this week, Canara Bank stock has fallen by 5.6%.
“Unless there is clarity on ECL norms, the Street will assume high ECL requirements for Canara Bank as well as other PSU banks. This worry is likely to keep the stock’s near-term outlook muted," said Mona Khetan, vice president, Dolat Capital Market. This is even as the outlook on asset quality has improved and remains a key driver for RoA expansion, she added.
