CMP: INR371 TP: INR360 (-3%) Neutral

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1 19 July QFY18 Results Update Sector: Financials Canara Bank BSE SENSEX S&P CNX 31,955 9,900 Motilal Oswal values your support in the Asiamoney Brokers Poll 2017 for India Research, Sales and Trading team. We request your ballot. Bloomberg CBK IN Equity Shares (m) M.Cap.(INRb)/(USDb) 148.0/ 52-Week Range (INR) 415 / 231 1, 6, 12 Rel. Per (%) 2/16/32 Avg. Val, INRm 1192 Free float (%) 33.7 Financials & Valuations (INR b) Y/E March 2018E 2019E 2020E NII OP NP EPS (INR) EPS Gr. (%) BV/Sh. (INR) RoE (%) RoA (%) P/E (x) P/BV (x) CMP: INR371 TP: INR360 (-3%) Neutral Slippages remain elevated; One off gains help PPoP Canara Bank s (CBK) PBT declined 18% YoY to INR2.7b, missing our estimate by ~68% due to elevated provisions of INR22.0b (57% higher than our estimate). Loan growth stood muted at 8% YoY due to 11% YoY decline in infra loans (13% of advances), despite retail/sme loans growing 8%/12% YoY. Reported NIM expanded 11bps QoQ to 4% (domestic NIM at 2.56%). NII grew 0%/18% QoQ/YoY. Adjusting for INR1.25b of interest on IT refund in 4QFY17, NII grew 5% QoQ. 1QFY18 NII had INR m of interest reversals. Gross slippages of INR55b (+78% QoQ) had INR7.92b contribution from demonetization moratorium and ~INR27.2b from 3-4 bulky corporate accounts. Absolute GNPA increased 10% QoQ to INR377b, while GNPA/NNPA stood at 10.56%/7.09% (+93bp/+76bp QoQ). Total stressed book stood at 14% of advances. Other highlights: (a) Non-interest income grew 33% YoY, aided by gain on CARE stake sale and INR1.3b of PSLC sales income. (b) CET1 ratio/tier 1 ratio/car stood at 8.72%/9.57%/12.61%. Valuation and view: Net stress addition has increased after a few quarters of decline. Given the weak operating environment, we would wait and watch developments in asset quality. Our SOTP-based target price stands at INR360 (0.5x June 2019E BV + INR70 for other investments); we have lowered our valuation multiple slightly from 0.6x FY19E BV last quarter due to prolonged provisioning pressure. Maintain Neutral. Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); Subham Banka (Subham.Banka@MotilalOswal.com); / Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Exhibit 1: Quarterly performance: Provisions more than offset PPOP (INR m) Y/E March 1QFY18A 1QFY18E Var. (%) Comments Net Interest Income 27,132 25,759 5 NII beat driven by higher than expected drop in cost % Change (YoY) of funds Other Income 21,085 19,442 8 Net Income 48,218 45,200 7 Operating Expenses 23,494 22,708 3 Operating Profit 24,724 22, % Change (YoY) Other Provisions 22,038 14, Additional provisions of INR4b for NCLT accounts and higher stress additions Profit before Tax 2,686 8, Tax Provisions 170 2, Net Profit 2,516 5, Core income largely inline; Elevated provisions drag % Change (YoY) profitability Source: MOSL, Company Other highlights Asset quality declines further; total stressed loans at 14% of advances GNPA/NNPA at 10.56%/7.09% increased 93bp/76bp QoQ. SDR/S4A/5:25/OSRL stood at 1.9%/0.7%/1.8%/%. PCR stood at 54.52% (-110bp QoQ). Total stressed loans stood at 13.8% of advances v/s 12% in 4QFY17. Gross slippages of INR55.1b (+78%/-16% QoQ/YoY) included INR 7.92b from demonetization-related moratorium and ~INR27b from 3-4 large accounts (steel, EPC and others). Net slippages of INR48.3b stood at 5.7% (annualized) of advances. Loan book growth sluggish, but moving in the right direction Total loan book growth was muted at 2%/8% QoQ/YoY owing to slowdown in infrastructure book (-6%/-11% QOQ/YoY), even as retail loan book grew 3%/8% QoQ/YoY and SME book rose 1%/12% QoQ/YoY. Infrastructure book decline was led by 24%/52% QoQ/YoY fall in airport and 10%/19% QoQ/YoY decline in power. Total retail loan book grew 3%/8% QoQ/YoY, led by housing/vehicle loan growth of 18%/22% YoY. CASA and retail term deposits together constitute 72% of total deposits, leading to comfort on cost of funds. CASA deposits growth was strong at 16% YoY (flat QoQ). SA deposits grew 17% YoY. Reported CASA ratio improved 29bp to 33.1% v/s 32.9% a quarter ago. Others Total branch count stood at 6,075 at end-4qfy17 (+111 branches QoQ). 19 July

3 4QFY17 conference call highlights Balance sheet related Margins should moderately improve from here. P/L related PSLC income at INR1.3b in 1QFY18 (recurring). Other income had INR4b of one-off treasury income. Interest reversal INR m in 1QFY18 Asset quality Additional provisions of INR4b for NCLT cases. Slippages breakup: Normal slippages of INR20.02b, INR7.92b of one-time slippages for demonetization moratorium, and the rest from 3-4 large accounts from steel, infra and EPC. Total exposure to 12 NCLT accounts is INR102b, should be resolved by Mar 18. Stressed assets breakup: 5:25 INR64b (std.), SDR INR87b (std., out of this INR20b in restructured), std. OSRL INR80b (~50% of EPC contractors, some textile and steel), S4A INR25b (added 4.3b in the quarter, no overlap with OSRL), SMA2 INR116b (INR30b of which is restructured accounts, and overdues are INR16.34b). INR900m more expected to be recovered from cement account. Total provision of INR56b needed for NCLT accounts; already provided INR39b (of which INR4b in 1QFY18), remaining ~INR18b through FY18. PCR they aim to improve 2-3% every year. Recoveries + upgrades smaller accounts are giving good results. Target normalized slippages of INR20-25b per quarter; expect additional slippages from restructured book. Telecom portfolio will provide 2% std. provisions every quarter. Maintain Neutral rating with target price of INR360 Valuation and view Over the last six years, CBK s profitability has declined significantly, led by compression in core revenues and higher provisioning costs. Net stress addition has increased over the last several quarters. Improvement in the economic environment remains the key. 1QFY18 PPoP had a contribution from trading gains (stake sale of CARE), indicating sustained pressure on PPoP growth. The RBI has allowed various tools apart from normal restructuring (5:25, SDR, S4A, sale to ARC-leading to security receipts etc.) to tackle the stress loans. Hence, actual overall stress loans have been significantly higher than reported NNPAs. Difference between reported BV and ABV (NNPA at 70%) is high at ~50%. Until the improvement in economic growth and resolution of key sectors problems (infra and iron & steel) come through, the markets would focus on adjusted P/BV. We maintain Neutral with an SOTP-based TP of INR380. We have cut PAT estimates by ~16.8%/4.5% for FY18/FY19. Despite attractive valuations, given the challenging operating environment, we would wait and watch developments 19 July

4 on asset quality. Our key assumptions are a) risk-free rate of 6.9%, b) risk premium of 5%, c) beta of 1.6x, d) average growth of ~15% over FY16-36E, and e) terminal growth rate of 5%. In view of prolonged stress additions and provision pressure, we have decreased the target multiple slightly from 0.6x FY19E BV to 0.5x of June 2019E BV. Subsidiaries add INR70 (19%) to our SOTP. Exhibit 2: Our SOTP is INR360 Stake Total Value Value per share % of Total Rationale Banking Business (A) x June 2019 BV; Based on RI Total Value of Key ventures Canfin Homes 31 83, Latest MCAP Canara HSBC 51 40, Based on peer valuation Canara Robecco Valued at 4% of AUM Less: Holdco discount 18 5 Value of Key Ventures (B) SOTP (A+B) CMP 371 Upside -3 Exhibit 3: We cut FY18/19 PAT estimates with an increase in provision estimates Source: MOSL, Company INR b Old Est Revised Est Change (%) FY18 FY19 FY20 FY18 FY19 FY20 FY18 FY19 FY20 Net Interest Income Other Income Total Income Operating Expenses Operating Profits Provisions PBT Tax PAT Loans 3,762 4,214 4,803 3,762 4,214 4, Deposits 5,547 6,324 7,272 5,547 6,324 7, Margins (%) Credit Cost (%) RoA (%) RoE (%) BV ABV EPS Source: MOSL, Company 19 July

5 Exhibit 4: Expect return ratios to improve gradually (%) Y/E MARCH FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E Net Interest Income Fee income Fee to core 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 Source: MOSL, Company 19 July

6 Story in charts Exhibit 5: Loan growth remained muted YoY (%) Loans (INR b) YoY gr. (%) (2) (1) (0) 2,499 2,811 2,877 3,011 3,030 3,109 3,123 3,300 3,241 3,231 3,319 3,247 3,213 3,271 3,316 3,420 3,482 Exhibit 6: CASA deposits grew 16% QoQ CASA Ratio (calc,%) CASA YoY gr. (%) QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY15 1QFY16 1HFY16 9MFY16 FY16 1QFY17 1HFY17 9MFY17 FY17 1QFY18 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY15 1QFY16 1HFY16 9MFY16 FY16 1QFY17 1HFY17 9MFY17 FY17 1QFY18 Source: Company, MOSL Source: Company, MOSL Exhibit 7: Reported global NIM increased 11bp QoQ Exhibit 8: Credit costs declined this quarter (%) 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY15 1QFY16 1HFY16 9MFY16 FY16 1QFY17 1HFY17 9MFY17 FY17 1QFY18 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY Source: Company, MOSL Source: Company, MOSL Exhibit 9: GNPA/NNPA went up QoQ Gross NPA (%) Net NPA (%) Exhibit 10: NNPA + OSRL stood at 9.4% (%) NNPA (%) OSRL (%) 1QFY14 1HFY14 9MFY14 FY14 1QFY15 1HFY15 9MFY15 FY15 1QFY16 1HFY16 9MFY16 FY16 1QFY17 1HFY17 9MFY17 FY17 1QFY QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY Source: Company, MOSL Source: Company, MOSL 19 July

7 Exhibit 11: Quarterly snapshot FY16 FY17 FY18 Variation (%) INR m 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q QoQ YoY Profit and Loss Net Interest Income 25,165 26,465 22,266 23,738 23,074 24,424 24,138 27,082 27, Other Income 11,130 12,105 11,686 13,832 15,847 17,818 17,917 23,963 21, Trading profits 1,980 2,950 1,610 3,360 6,070 5,030 7,470 11,250 8, Forex Income 1,020 1,650 2,090 1,930 2,760 3,170 2,640 1,140 1, Recoveries 2,100 1,610 1, , ,870 1, Core Fees 6,030 5,895 6,576 7,582 6,517 8,008 6,897 9,703 9, Total Income 36,295 38,570 33,952 37,570 38,921 42,241 42,055 51,045 48, Operating Expenses 16,259 19,129 18,427 21,104 20,732 20,834 22,242 21,316 23, Employee 10,588 11,078 10,398 12,395 12,082 12,169 13,057 11,842 13, Others 5,672 8,050 8,030 8,709 8,650 8,664 9,184 9,473 9, Operating Profits 20,036 19,441 15,524 16,466 18,189 21,408 19,813 29,729 24, Provisions 13,597 12,123 14,289 63,315 14,929 15,857 14,846 27,087 22, NPA provisions 13,140 9,790 14,320 58,830 14,690 15,580 14,870 29,240 22, Provisions on Invst. 1, , Others ,693-1,582 5, ,603-1, PBT 6,438 7,318 1,236-46,850 3,260 5,550 4,968 2,642 2, Taxes 1,650 2, , ,981 1, PAT 4,788 5, ,055 2,290 3,569 3,219 2,142 2, Asset Quality GNPA 1,30,806 1,40,213 1,98,134 3,16,378 3,23,341 3,33,154 3,43,387 3,42,020 3,76, NNPA 88,881 93,825 1,29,401 2,08,329 2,14,939 2,18,871 2,22,958 2,16,490 2,43, GNPA (%) NNPA (%) PCR (Calculated, %) PCR (Reported, %) Slippages 25,190 22,010 54,020 1,46,020 38,780 24,490 22,250 31,000 55, Slippage Ratio (%) Restructured loans* 2,30,370 2,28,910 2,06,080 1,30,633 1,33,801 1,31,470 1,20,001 1,13,650 80, % 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 3,241 3,231 3,319 3,247 3,213 3,271 3,316 3,420 3, Retail Loans Deposits 4,719 4,852 4,906 4,798 4,653 4,843 5,103 4,953 4, CASA Deposits 1,097 1,160 1,181 1,235 1,283 1,317 1,537 1,497 1, Savings Deposits ,037 1,078 1,111 1,321 1,272 1, Current Deposits Source: MOSL, Company 19 July

8 Financials and Valuations Income Statement (INR Million) Y/E March E 2019E 2020E Net Interest Income 78,790 89,442 96,637 97,634 98,718 1,13,042 1,24,534 1,44,077 Change (%) Non Interest Income 31,530 39,328 45,503 48,752 75,544 73,885 78,342 86,118 Net Income 1,10,320 1,28,770 1,42,139 1,46,386 1,74,262 1,86,926 2,02,876 2,30,195 Change (%) Operating Expenses 51,420 60,810 72,636 74,919 85,123 93,531 1,03,180 1,13,917 Pre Provision Profits 58,900 67,960 69,504 71,467 89,140 93,395 99,696 1,16,277 Change (%) Provisions (excl tax) 22,179 37,330 34,527 1,03,324 72,720 67,358 58,985 62,320 PBT 36,721 30,630 34,976-31,858 16,420 26,038 40,711 53,957 Tax 8,000 6,250 7,950-3,730 5,200 8,072 12,620 16,727 Tax Rate (%) PAT 28,721 24,380 27,026-28,128 11,220 17,966 28,090 37,230 Change (%) Pref. Dividend (Incl tax) Profits for Equity SH 28,721 24,380 27,026-28,128 11,220 17,966 28,090 37,230 Change (%) Equity Dividend (Incl tax) 6,740 5,936 6, ,093 3,273 4,337 Core PPP* 44,488 50,376 46,392 48,797 44,715 55,894 63,195 78,276 Change (%) *Core PPP is (NII+Fee income-opex) Balance Sheet (INR Million) Y/E March E 2019E 2020E Equity Share Capital 4,430 4,613 4,752 5,430 5,973 5,973 5,973 5,973 Reserves & Surplus 2,44,348 2,91,589 3,13,840 3,10,602 3,30,883 3,46,040 3,70,143 4,02,321 Net Worth 2,48,778 2,96,201 3,18,592 3,16,032 3,36,855 3,52,013 3,76,116 4,08,294 Deposits 35,58,560 42,07,228 47,38,401 47,97,916 49,52,760 55,47,091 63,23,684 72,72,237 Change (%) of which CASA Dep 8,60,613 10,32,794 11,35,322 12,35,422 14,97,490 17,22,114 19,80,431 22,77,495 Change (%) Borrowings 2,02,834 2,72,306 2,56,716 2,68,733 3,95,036 4,27,551 4,64,372 5,06,086 Other Liabilities & Prov. 1,13,255 1,43,483 1,66,297 1,46,927 1,50,551 1,65,536 1,82,321 2,01,157 Total Liabilities 41,23,426 49,19,219 54,80,006 55,29,608 58,35,202 64,92,191 73,46,492 83,87,774 Current Assets 3,47,147 4,48,287 4,86,411 5,67,337 5,88,255 6,53,868 7,71,008 8,95,025 Investments 12,11,328 12,68,283 14,20,614 14,23,093 15,02,659 17,28,058 19,87,266 22,85,356 Change (%) Loans 24,21,766 30,10,675 33,00,355 32,47,148 34,20,088 37,62,096 42,13,548 48,03,445 Change (%) Fixed Assets 28,627 66,416 69,494 71,981 71,683 70,408 69,132 67,857 Other Assets 1,14,557 1,25,558 2,03,131 2,20,049 2,52,510 2,77,761 3,05,537 3,36,091 Total Assets 41,23,426 49,19,219 54,80,006 55,29,608 58,35,194 64,92,191 73,46,492 83,87,774 Asset Quality (%) GNPA (INR M) 62,602 75,702 1,30,399 3,16,380 3,42,020 3,70,681 3,62,948 3,44,529 NNPA (INR M) 52,780 59,654 87,862 2,08,928 2,17,831 2,31,852 2,18,290 1,91,260 GNPA Ratio NNPA Ratio Slippage Ratio Credit Cost PCR (Excl Tech. write off) PCR (Incl Tech. Write off) E: MOSL Estimates 19 July

9 Financials and Valuations Ratios Y/E March E 2019E 2020E 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. (INR m) NP per Empl. (INR lac) * ex treasury Asset-Liability Profile (%) Loans/Deposit Ratio CASA Ratio Investment/Deposit Ratio G-Sec/Investment Ratio CAR Tier Valuation 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 (%) E: MOSL Estimates 19 July

10 Corporate profile Company description Set up in 1906, Canara Bank (CBK) it one of the oldest banks in the India. The government nationalized the bank in Over the years bank has made several acquisitions, major one being Lakshmi Commercial Bank which gave significant presence in northern India. As of September 2016, the bank had a network of 5,868 branches and 10,026 ATMs spread across India. The bank also has several overseas branches and subsidiaries / joint ventures (Can Fin Homes Limited, Canara Robeco AMC, Canara HSBC Oriental Life Insurance Company amongst others). Exhibit 1: Sensex rebased Source: MOSL/Bloomberg Exhibit 2: Shareholding pattern (%) Jun-17 Mar-17 Jun-16 Promoter DII FII Others Note: FII Includes depository receipts Source: Capitaline Exhibit 3: Top holders Holder Name % Holding LIFE INSURANCE CORPORATION OF INDIA 13.6 HDFC TRUSTEE COMPANY LIMITED 4.3 RELIANCE CAPITAL TRUSTEE CO LTD 1.5 Source: Capitaline Exhibit 4: Top management Name Designation Thothala Narayanasamy Manoharan Chairman (Non-Executive) Rakesh Sharma Managing Director & CEO Dina Bandhu Mohapatra Executive Director Harideesh Kumar B Executive Director Pradyuman Singh Rawat Executive Director B Nagesh Babu Company Secretary Exhibit 5: Directors Name G V Manimaran Sairam Mocherla Rajinder Kumar Goel Uma Shankar Name Sanjay Jain Sunil Hukumchand Kocheta Pankaj Jain Source: Capitaline *Independent Exhibit 6: Auditors Name J L Sengupta & Co J Singh & Associates Ram Raj & Co S C Vasudeva & Co V K Niranjan & Co Type Statutory Statutory Statutory Statutory Statutory Source: Capitaline Exhibit 7: MOSL forecast v/s consensus EPS (INR) MOSL forecast Consensus forecast Variation (%) FY FY FY Source: Bloomberg 19 July

11 N O T E S 19 July

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