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Canara Bank 3QFY2012 performance highlights and results update

Contributed by Angel Broking

For 3QFY2012, Canara Bank posted a poor set of results with net profit declining by 20.8% yoy to Rs.876cr. While asset quality improved during the quarter, higher MTM losses on investments and NPV loss on account of restructuring of GTL dented the bottom line. We maintain our Accumulate recommendation on the stock.

NIMs remain under pressure; Slippage levels continue to decline: For 3QFY2012, the bank’s overall business growth remained muted with advances growing by 0.6% qoq (15.5% yoy) and deposits growing by 0.9% qoq (19.7% yoy). On the deposits side, the volatile current account deposits decreased by 33.7% qoq (down 38.1% yoy). Saving account deposits also decreased sequentially by 1.1% qoq (up 8.2% yoy), leading to calculated CASA ratio declining by 224bp qoq to 23.6%. The bank’s reported NIMs slipped by 12bp to 2.5% during 3QFY2012 on account of 14bp rise in the cost of deposits to 7.3%. Commission and brokerage income remained muted during the quarter growing by 0.5% qoq (21.2% yoy) to Rs.205cr. Recoveries from written-off accounts which have been strong over the past few quarters, halved sequentially to Rs.68cr. The banks slippage levels at Rs.862cr (~250cr due to 2 accounts and expected to be upgraded in 4QFY2012) declined for the 3rd consecutive quarter. The bank took a hit of Rs.185cr on MTM losses during 3QFY2012. The bank restructured Rs.1,559cr worth of accounts during 3QFY2012, of which Rs.1,000 was on account of restructuring of GTL (also led to NPV loss of ~Rs.150cr). The outstanding restructured book as of 3QFY2012 stands at Rs.9,555cr.

Outlook and valuation: The stock has considerably underperformed the peers (Bank Nifty by 15% over the past one year), primarily due to concerns regarding NIMs and asset quality. Though a weakening domestic macro-economic environment and consequently slower credit growth and ailing asset quality are likely to cap near-term upsides, but cyclically moderate valuations of 1.0x FY2013E ABV vs. 5-year average of 1.15x and range of 0.8-1.4x, in our view largely factor in the negatives. Hence, we recommend Accumulate on the stock with a target price of Rs.528.