Canara Bank. CMP: INR250 TP: INR300 Neutral

Transcription

1 BSE SENSEX S&P CNX 20,491 6,079 Bloomberg CBK IN Equity Shares (m) M.Cap. (INR b) / (USD b) 109.4/ Week Range (INR) 550/190 1, 6, 12 Rel. Per (%) 5/-42/-52 Financials & Valuation (INR Billion) Y/E MAR E 2015E NII OP NP EPS (INR) EPS Gr. (%) BV/Sh P/E (x) P/BV (x) RoE (%) ROA (%) November QFY14 Results Update Sector: Financials Canara Bank CMP: INR250 TP: INR300 Neutral Sequentially flat NIM disappointing: Despite strong loan growth (+13% QoQ and +30% YoY), asset reallocation (CD ratio up 700bp QoQ to 72%) and higher share of low cost deposits (CASA ratio up 140bp), sequentially flat NIM disappointed us. Led by high loan growth, NII (INR7.7b) was 7% above our estimate. Guidance of strong loan growth concerning: QoQ loan growth was driven by Retail Housing (+28% QoQ; +42% YoY), MSME (+17% QoQ; +30% YoY), NBFC (+50% QoQ; +60% YoY) and Power (+16% QoQ; 60% YoY). These segments contributed 80%+ of the incremental loans, QoQ. The management has guided strong loan growth of 25%+ for FY14, which is a concern in an uncertain environment. Lower slippages: Net slippages declined to INR6.4b (annualized 1.2% of loans) v/s INR13.3b a quarter ago (2.4%), led by lower slippages of INR15.2b (2.8%) v/s INR26.9b (4.8%). Incremental restructuring was INR10b (INR16.8b in 1Q) and OSRL (ex SEB/AI) stood at INR109b (3.9% of loans). Other highlights: (a) Led by higher loan growth, fees grew 33%/31% YoY in 2Q/1H, (b) Savings deposits grew 8% QoQ and 14% YoY, (c) Share of bulk deposits increased 40bp QoQ to 13.8% (38% in 2QFY13), and (d) Investments declined 12% QoQ. Valuation and view: While valuations at 0.4x FY15E BV appear attractive, we remain concerned about strong loan growth, low CASA ratio (26%), high unprovided MTM (INR7.1b) and high share of infra loans (19%). Further, additional capital infusion will lead to BV dilution of ~2%. Key positives are (a) NSL (ex SEB/AI) of ~6.2%, in line with peers, and (b) relatively better capitalization, with CET1 of ~8.5%. Maintain Neutral. Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); Sohail Halai (Sohail.Halai@MotilalOswal.com); Investors are advised to refer through disclosures made at the end of the Research Report.

2 Quarterly performance: Core operations disappoint (INR m) Y/E March 2QFY14A 2QFY14E Var. (%) Comments Net Interest Income 21,912 20,488 7 % Change (YoY) 12 5 Strong loan growth of 13% QoQ drives NII surprise Other Income 7,730 7,691 1 Strong fee income performance Net Income 29,642 28,179 5 Operating Expenses 15,392 13, Other operating expenses higher than expected Operating Profit 14,250 14,225 0 % Change (YoY) Other Provisions 6,740 9, MTM lower than expected Profit before Tax 7,509 4, Tax Provisions 1, Tax rate lower than expected Net Profit 6,259 3, % Change (YoY) Lower provisions and high loan growth driving PAT beat Strong loan growth at low loan spreads A concern CBK utilized excess liquidity in the balance sheet and grew its loan book aggressively by 13% QoQ. Management mentioned that large part of the growth during the quarter came from AA and above rated corporate. More than 80% of the incremental growth is driven by CRE, NBFC, retail housing, SEBs, disbursements to sanctions for non SEB power projects and MSMEs. Growth in the CRE segment was strong at 55% QoQ, however it was on a lower base For incremental growth focus remains on retail segment which grew 20% QoQ and 36% YoY. Within retail strong growth was witnessed in the housing sector (+28% QoQ, 42% YoY). Led by tight liquidity conditions and lowest BASE rate in the system, CBK opportunistically grew in NBFCs segment (+ 51% QoQ and 60% YoY). Infra loans grew 12% QoQ and 36% YoY led by 16% QoQ and 60% YoY growth in power segment. Within power, SEB loans (75% of power loans) grew 19% QoQ and 40% YoY. Flat NIMs despite utilizing excess liquidity in balance sheet Disappointed Despite strong loan growth (+13% QoQ and +30% YoY), asset reallocation (CD ratio up +700bp QoQ) and high share of low cost deposits (CASA ratio up 140bps), flat NIMs QoQ disappointed us. Led by high loan growth NII was 7% above estimates. Derived 2Q cost of funds was down 10bp QoQ to 6.8% and Yield on funds were flat QoQ at 8.8%. In a tight liquidity conditions 25bp drop in yield on loans to 10.5% disappointed us. Net stress addition lower QoQ NSL (ex SEB/AI) at 6.2% Slippages during the quarter declined to INR15.2b (annualized slippage ratio of 2.8%) v/s INR26.9b in 1QFY14. Recoveries and upgrades during the quarter were at INR8.9b (v/s 13.6b in 1QFY14) and write offs were at INR4.9b (v/s INR2.6b in 1QFY14). 13 November

3 GNPA/NNPA in absolute terms each increased 2/4%+ QoQ and in % terms GNPA and NNPA was at 2.6% (2.9% in 1QFY14) and 2.3% (2.5% in 1QFY14). PCR (including technical write-off) lower at 57.8% as compared to 58.2% in 1QFY14. During the quarter, CBK restructured loans worth of INR10b (0.4% of loans). O/s standard restructured loan portfolio stood at INR181b (6.4% of loans), of which power (INR77.6b) and aviation (INR10.4b) together formed ~INR88b i.e. (~45% of restructured loan). Other highlights CBK transferred INR196b of government securities from AFS to HTM portfolio and booked a loss of INR1.4b. As of 1HFY14, MTM requirement on AFS portfolio stood at INR10.6b of which CBK was required to make provisions of INR3.6b (1/3 rd of amortized amount as per RBI guideline) CBK was carrying INR3b of MTM provisions on investments as of 1QFY14 thus, just additional INR0.8b provided during the quarter. As of 1HFY14, an unprovided MTM provision on balance sheet stands at INR7.1b which is to be recognized in 2HFY14. Valuations and view While valuations at 0.4x FY15 PBV is attractive, we remain concerned about strong loan growth, low share of CASA ratio (25.6%), high un-provided MTM (INR7.1b) and high share of infra loans (19% ). Further additional capital infusion of INR5b will lead to capital dilution of ~4% and BV dilution of ~2%. Key triggers are a) Sooner than expected economic recovery b) fall in interest rates and c) improvement in liquidity in the system Key positives are a) NSL (ex SEB/AI) of ~6.2% is in-line with peers and b) relatively better capitalization with CET1 of ~8.5%. Maintain Neutral. Conference Call highlights Optimistic about growth; target loan growth of 26-30% for FY14 Growth was broad based. One of the lowest base rate in the industry has helped the bank to attract customers. Sanctioned 7 projects in 1H of INR2.5b and above, totaling INR60b (consortium lenders in 5-6 projects) at the yield of %. Expect growth to be in the range of 26-30% for FY14. Deposit growth is expected to be 17% for FY14. Growth in power generation has increased significantly on account of disbursements to SEBs and is short term loans which will get repaid in ensuing quarters. Private power projects is 25% of the overall power exposure. During the quarter fresh disbursement was given to TN SEB INR10b, Dakshin Haryana apart from other SEBs Growth in NBFCs exposure is driven by disbursement to high rated corporate like HDFC, India Bull housing finance, Capital First, Tata housing and Dewan housing where the ticket size would be INR3-5b. Average lending rate in NBFC segment was % Most of the growth in SME segment is coming from two scheme Pragatti and Unnati which are under CGTSME Home loans are partially on account of increasing tie-ups with the builders. During 1HFY14 bank has bought out portfolio of INR8.5b. 13 November

4 Restructuring pipeline of INR30-35b; Efforts increase to improve recoveries Strong monitoring mechanism and more efforts were put in for containing slippages. Recoveries effort put in has also led to net slippages being lower. The accounts slipped during the quarter: (1) Bharti shipyard INR2.2b, (2) Abhijeet group - INR2b and (3) forever diamonds INR1.6b. Rest has been less than INR500m. One large account allied strip of INR3b which slipped into NPA in 1QFY14 was upgraded during the quarter. Restructuring done during the quarter was led by two large accounts worth INR7.5b. Of the O/s standard restructured loan SEB and AI forms INR60b and INR12b. Bonds are yet to come from the discoms as the package was still under implementation at end of 2QFY14. Restructuring pipeline is of INR30-35b. Dicoms expected to be restructured in 2H: Ajmer - INR1.1b, Jaipur INR7.5b, Uttar Haryana INR7.7b and Dakshin Haryana - INR6.7b. 13 projects could come up for restructuring in coming few quarters (1) Educomp INR2.1b, (2) PSL INR3b, (3) Soma INR2b and (4) Electro therm INR4.1b, (4) Ideal energy INR4.2b and (5) Gangotri INR1.4b Other highlights Efforts will be to improve NIMs to the level of 2.5%. For wage provisions bank has made INR550m during the quarter and overall provision made so far is INR2b. Bank has adopted latest mortality table for calculation of pension and gratuity liability. Added 500+ branches and 250+ ATMs in the quarter. Focusing of alternate delivery channels to bring in cost efficiency. High growth in fee income was driven improvement across streams (on a lower base). CET1 is 9% (including 1HFY14 profits) and CBK is expecting capital infusion of INR5b in 3Q. CBK is also hopeful of receiving additional INR6b in 2H from GOI. Bulk deposit has come down to 13.5% from high of 44-45%. 13 November

5 Upgrading earning estimates to factor in higher loan growth INR b Old Estimate Revised Estimate Change (%) FY14 FY15 FY14 FY15 FY14 FY15 Net Interest Income Other Income Total Income Operating Expenses Operating Profits Provisions PBT Tax PAT Loans 2,809 3,259 3,027 3, Deposits 4,021 4,665 4,128 4, Margins (%) Credit Cost (%) RoA (%) RoE (%) Canara Bank: One-year forward P/BV Canara Bank: One-year forward P/E 1.9 P/B (x) Avg(x) Peak(x) Min(x) 12 P/E (x) Avg(x) Peak(x) Min(x) Oct-06 May- Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr Oct-10 Apr-11 Oct Apr-12 Oct-12 Apr Oct Oct-06 May-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr Oct Apr-11 Oct Apr-12 Oct-12 Apr Oct-13 Dupont Analysis Y/E MARCH FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E Net Interest Income Fee income Core Income Operating Expenses Cost to Core Income Employee cost Other operating expenses Core operating Profits Trading and others Operating Profits Provisions NPA provisions Other Provisions PBT Tax Tax Rate RoA Leverage (x) RoE November

6 Strong loan growth CD ratio improves as bank utilizes excess liquidity (%) Strong loan growth of 13% QoQ driven by CRE, NBFC, Power and retail housing segment for the quarter 1QFY10 1HFY10 9MFY10 FY10 1QFY11 1HFY11 9MFY11 FY11 1QFY12 1HFY12 9MFY12 FY12 1QFY13 1HFY13 9MFY13 FY13 1QFY14 CD ratio improved with strong advances growth of 13% QoQ, 30% YoY and deposit growth of 2.5% QoQ, 16.3% YoY 1HFY14 CASA ratio improves QoQ CASA Ratio (calc,%) CASA YoY gr. (%) (1) (4) NIM stable QoQ despite strong loan growth (%) QFY10 1HFY10 9MFY10 FY10 1QFY11 1HFY11 9MFY11 FY11 1QFY12 1HFY12 9MFY12 FY12 1QFY13 1HFY13 9MFY13 FY13 1QFY14 CASA ratio improved with growth coming from both CA of 6% QoQ, 16% YoY and SA of 8% QoQ, 14% YoY 1HFY14 1QFY10 1HFY10 9MFY10 FY10 1QFY11 1HFY11 9MFY11 FY11 1QFY12 1HFY12 Asset reallocation (CD ratio up 700bp QoQ) and higher share of low cost deposits (CASA ratio up 140bp) helped bank only to keep NIMs stable indicating pressure on loan spreads 9MFY12 FY12 1QFY13 1HFY13 9MFY13 FY13 1QFY14 1HFY14 GNPA performance better than the peers Gross NPA (%) Net NPA (%) Slippages (INR b) decline QoQ (INR b) QFY11 1HFY11 9MFY11 FY11 1QFY12 1HFY12 9MFY12 FY12 1QFY13 1HFY13 9MFY13 FY13 1QFY14 1HFY14 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 Asset quality remains better than peers with GNPA/NNPA in abs terms increased 2/4% QoQ Source: Company, MOSL Of the accounts slipped during the quarter three large accounts formed INR5.8b Source: Company, MOSL 13 November

7 Quarterly Snapshot FY13 FY14 Variation (%) Cumulative Numbers INR m 1Q 2Q 3Q 4Q 1Q 2Q QoQ YoY 1HFY13 1HFY14 YoY Gr (%) Profit and Loss Net Interest Income 18,435 19,568 19,880 20,906 19,911 21, ,003 41, Other Income 6,926 6,081 8,458 10,065 12,383 7, ,007 20, Trading profits ,510 2,520 4, ,728 5, Forex Income 1, ,080 1,350 1,780 1, ,219 2, Recoveries , ,108 1, Core Fees 4,171 3,781 4,278 4,865 5,363 5, ,952 10, Total Income 25,362 25,649 28,338 30,971 32,294 29, ,010 61, Operating Expenses 11,424 12,828 13,174 13,994 13,311 15, ,252 28, Employee 7,430 7,911 8,311 8,884 8,871 9, ,341 18, Others 3,994 4,917 4,864 5,110 4,441 6, ,911 10, Operating Profits 13,938 12,821 15,164 16,977 18,983 14, ,759 33, Provisions 4,185 4,211 6,259 7,524 9,162 6, ,397 15, NPA provisions 4,770 4,444 5,940 3,460 4,430 3, ,214 7, Provisions on Invst. -2,050-1,203-1, ,253 1, Others 1, ,609 3,224 3,852 2, ,435 6, PBT 9,752 8,610 8,905 9,454 9,821 7, ,362 17,330-6 Taxes 2,000 2,000 1,800 2,200 1,900 1, ,000 3, PAT 7,752 6,610 7,105 7,254 7,921 6, ,362 14,180-1 Asset Quality GNPA 44,966 56,095 60,901 62,602 73,289 74, NNPA 37,556 45,686 51,347 52,781 62,092 64, GNPA (%) NNPA (%) PCR (Calculated, %) N.A. N.A. PCR (Reported, %) N.A. Slippages 14,970 19,220 13,140 10,860 26,880 15, Slippage Ratio (%) Credit Cost (%) Restructured loans* 129, , , , , , % to Loans Ratios (%) Fees to Total Income Cost to Core Income Tax Rate CASA (cal) Loan/Deposit CAR Tier I Margins - Cumulative (%) Yield on loans Yield On Investments Cost of Deposits Margins Balance sheet (INR b) Loans 2,256 2,158 2,182 2,422 2,499 2, Retail Loans Deposits 3,346 3,368 3,240 3,559 3,820 3, CASA Deposits Savings Deposits Current Deposits Investments 1,117 1,207 1,188 1,211 1,361 1, * Bank changed its accounting treatment from borrower-wise classification to facility wise in 4QFY13 13 November

8 EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY FY Stock performance (1-year) Shareholding pattern (%) Sep-13 Jun-13 Sep-12 Promoter Domestic Inst Foreign Others November

9 Financials and valuation Income Statements (INR Billion) Y/E March E 2015E Interest Income Interest Expense Net Interest Income Change (%) Non Interest Income Net Income Change (%) Operating Expenses Pre Provision Profits Change (%) Provisions (excl tax) PBT Tax Tax Rate (%) Profits for Equity SH Change (%) Equity Dividend (Incl tax) Core PPP* Change (%) Balance Sheet (INR Billion) Y/E March E 2015E Equity Share Capital Reserves & Surplus Net Worth Deposits 3, , , ,788.4 Change (%) of which CASA Dep ,100.9 Change (%) Borrowings Other Liabilities & Prov Total Liabilities 3, , , ,529.4 Current Assets Investments 1, , , ,462.7 Change (%) Loans 2, , , ,511.6 Change (%) Fixed Assets Other Assets Total Assets 3, , , ,529.4 Asset Quality (INR Billion) Y/E March E 2015E GNPA NNPA GNPA Ratio NNPA Ratio PCR (Excl Tech. write off) PCR (Incl Tech. Write off) Ratios Y/E March E 2015E Spreads Analysis (%) Avg. Yield-Earning Assets Avg. Yield on loans Avg. Yield on Investments Avg. Cost-Int. Bear. Liab Avg. Cost of Deposits Interest Spread Net Interest Margin Profitability Ratios (%) RoE RoA Int. Expense/Int.Income Fee Income/Net Income Non Int. Inc./Net Income Efficiency Ratios (%) Cost/Income* Empl. Cost/Op. Exps Busi. per Empl. (Rs m) NP per Empl. (Rs lac) Asset-Liabilty Profile (%) Loans/Deposit Ratio CASA Ratio Investment/Deposit Ratio G-Sec/Investment Ratio CAR Tier Valuation Y/E March E 2015E Book Value (INR) Change (%) Price-BV (x) Adjusted BV (INR) Price-ABV (x) EPS (INR) Change (%) Price-Earnings (x) Dividend Per Share (INR) Dividend Yield (%) November

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