CANARA BANK RESEARCH. Canara Bank. EQUITY RESEARCH July 29, 2008 RESULTS REVIEW

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1 RESULTS REVIEW Share Data Market Cap Rs mn Price Rs BSE Sensex 13, Reuters Bloomberg Avg. Volume (52 Week) CNBK.BO CBK IN 0.2 mn 52-Week High/Low Rs / Shares Outstanding Valuation Ratios 410 mn Year to 31 March 2009E 2010E EPS (Rs.) /- (%) -8.3% 2.2% PER (x) 5.4x 5.3x P / PPP (x) 2.2x 2.0x P / ABV (x) 0.8x 0.7x Shareholding Pattern (%) Promoter 73 FIIs 14 Institutions 6 Public & Others 7 Relative Performance Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 CBK Rebased BSE Index Canara Bank Sound performance, better prospects Canara Bank recorded a 15% yoy growth in operating profit for Q1 09, but net profit declined 49% due to marked-to-market (MTM) losses. The Bank s total income reached Rs. 41 bn, driven by a 14.5% growth in income from advances. This impacted the net interest margin (NIM) favourably. We maintain a buy rating on account of the following reasons: Growth in NII and NIM: The Bank has recorded a 14% yoy growth in the net interest income (NII). This was probably on account of a 14.5% growth in income from advances. This growth in NII was a major driver of the 15% growth in the operating profit this quarter. Alongside, the surge in the NII has also improved the NIM from 2.42% to 2.57% qoq. Improvement in asset quality: The Bank s asset quality also improved during the quarter. While the gross NPA ratio came down from 1.55% (as on June 2007) to 1.31% (as on June 2008), the net NPA ratio declined from 0.89% to 0.85%. Cost of deposits: A high cost of deposits is a cause for concern as we believe that the tightening of the monetary policy this quarter has led to a rise in the cost of deposits. At the same time, the impact of the Bank s attempt to shed the high cost preferential deposits will be reflected in the following quarters. Also, we believe that the Bank will continue to improve its CASA ratio, as it did this quarter, due to major attempts at restructuring the business and the introduction of a wide range of products. Key Figures (Standalone) Quarterly Data Q1'08 Q4'08 Q1'09 YOY % QOQ% FY07 FY08 YOY % (Figures in Rs. mn, except per share data) Net Interest Income 629 2, % (61.0)% 6,579 6,564 (0.2)% Net Operating Income 4,631 6,144 4,135 (10.7)% (32.7)% 16,851 22, % Pre-Prov Operating Profit 2,574 3,050 2,016 (21.6)% (33.9)% 9,066 13, % Net Profit 1,531 2,450 1, % (34.8)% 6,303 7, % Cost/Net Operating Income(%) 44.4% 50.4% 51.2% % 41.8% - Net Interest Margin 0.28% % % 0.68% - NPA ratio 1.15% 1.30% 1.36% % 1.30% - Per Share Data (Rs.) PPP per share (21.7)% (34.0)% % EPS % (34.9)% % Please see the end of the report for disclaimer and disclosures. -1- Buy

2 Result Highlights The NII rose 14% yoy and the NIM improved to 2.57% in Q1 09. Operating profit recorded a 15% yoy growth to reach Rs bn. However, net profit declined by 49% over the same period on account of an 80% increase in provisions, but for which net profit would have increased significantly by 54%. Consequently, the EPS declined by 49.1% and stood at Rs The Bank s global business rose to Rs. 2,662 bn, recording a 12% yoy growth. The aggregate business was driven by a 9.2% growth in deposits and a 16.1% growth in net advances. The credit deposit ratio stood at 70.4% this quarter, and the CASA ratio also improved to 34.2%. Percent of Gross and Net NPAs 1.90% 1.70% 1.50% 1.30% 1.10% 0.90% 0.70% 0.50% Q1'08 Q2'08 Q3'08 Q4'08 Q1'09 % of Gross NPAs % of Net NPAs The loan portfolio illustrates the bank s intention of moving towards the priority segment and reducing its retail segment exposure. The Retail banking portfolio of the Bank slowed down, in tune with the industry trend, and stood at 16.15% of the net credit. Direct housing loans constituted 37% of the retail lending portfolio, of which a majority comes under the priority ambit. Concurring with the above, outstanding advances to the priority segment registered a 12% yoy growth to reach Rs bn. Credit to the SME segment recorded a 27% growth to reach Rs bn, compared with Rs bn as on June The education loan portfolio recorded a 33.7% growth. Please see the end of the report for disclaimer and disclosures. -2-

3 Gross NPAs decreased from Rs bn in Q1 08 to Rs bn this quarter, which could be on account of moderation in retail lending. For the same period, net NPAs increased from Rs. 8.4 bn to Rs. 9.4 bn. However, the net NPA ratio fell from 0.89% to 0.85% yoy, depicting an improving asset quality. Outlook The Bank targets surpassing the Rs. 3,000 bn mark for its global business in 2009, wherein deposits are to exceed Rs. 1,750 bn and advances are to exceed Rs. 1,250 bn. We also expect the NII and NIM to increase from their 2008 levels, although an increase in the cost of deposits due to the tightening of the monetary policy cannot be ruled out. The increase in the cost of deposits could, in turn, impact margins. Other income, which contributed more than 35% to the total operating income, was a cause for concern as miscellaneous income (which is unstable in nature) accounted for a major portion of other income. However, in line with Q4 08, fee income increased by 25.7% yoy and stood at Rs. 3.5 bn. This was a result of restructuring the core operations and increasing the product range and quality. This trend is expected to continue and will help increase the proportion of fee income in other income. However, an expected increase in provisions and contingencies could adversely impact the bottom line, as it did in this quarter. Valuation Canara Bank has been valued by using the three-stage Discounted Equity Cash Flow Model. We have arrived at a target price of Rs. 219, having assumed a 15% cost of equity and an 8.9% terminal growth rate. At the current price of Rs , the stock quotes at 0.78x P/ABV. Thus, we reiterate our Buy rating. Please see the end of the report for disclaimer and disclosures. -3-

4 Income Statement Key Ratios (Rs mn, Yr. ending March 31) FY07 FY08 FY09E FY10E FY07 FY08 FY09E FY10E Interest Income 113, , , ,662 Per share data (Rs.) Interest Expense 73, , , ,887 Shares outstanding (mn) Net Interest Income 40,268 35,378 43,537 47,775 Basic EPS YoY Growth (%) 12.4% -12.1% 23.1% 9.7% Diluted EPS Other Income 14,509 22,129 21,435 23,507 Book value per share Net Operating Income 54,778 57,507 64,972 71,282 Adj. book value per share YoY Growth (%) 11.9% 5.0% 13.0% 9.7% Operating Expense 25,653 27,913 31,356 34,576 Valuation ratios (x) Pre-Provisioning Profit 29,125 29,594 33,616 36,706 P/PPP 2.74x 3.12x 2.17x 1.98x Provisions and Contingencies 12,417 11,444 16,707 18,273 P/E 5.6x 6.3x 5.4x 6.3x Profit Before Tax 16,708 18,150 16,909 18,434 P/B 0.8x 0.9x 0.6x 0.9x Tax 2,500 3,400 3,382 4,608 P/ABV 1.0x 1.1x 0.8x 0.7x Net Profit 14,208 14,750 13,528 13,825 YoY Growth (%) 5.8% 3.8% -8.3% 2.2% Performance ratio (%) Return on avg. assets 1.0% 0.9% 0.7% 0.6% Balance Sheet Return on avg. net worth 16.3% 14.1% 12.3% 11.4% (Rs mn, as on March 31) FY07 FY08 FY09E FY10E Cash and balances with RBI 163, , , ,112 Balance Sheet ratios (%) Investments 452, , , ,866 Advances to deposits 69.2% 69.6% 70.0% 69.6% YoY Growth (%) 22.3% 10.1% 13.9% 11.0% Borrowings to advances 1.6% 2.3% 2.6% 2.9% Advances 985,057 1,072,380 1,228,419 1,344,287 Investments to assets 27.3% 27.6% 27.6% 27.6% YoY Growth (%) 24.0% 8.9% 14.6% 9.4% Investments to deposits 31.8% 32.3% 32.3% 32.3% Fixed Assets (Net) 28,614 29,169 29,264 29,491 Net Worth to assets 6.2% 5.8% 5.6% 5.5% Other Assets 29,945 26,842 20,562 22,856 Total Assets 1,659,610 1,805,287 2,056,230 2,285,612 Productivity ratio (Rs. mn) Opt. expense per employee Deposits 1,423,815 1,540,724 1,754,885 1,948,242 Net profit per employee YoY Growth (%) 21.9% 8.2% 13.9% 11.0% Asset per employee Non-deposit liablilities 132, , , ,753 YoY Growth (%) 48.8% 20.6% 16.4% 13.5% Operating ratios (%) Total Liabilities 1,556,071 1,700,282 1,940,568 2,158,995 Operating cost to avg. assets 1.7% 1.6% 1.6% 1.6% Share Capital 4,100 4,100 4,100 4,100 Source: Bank data, Indiabulls research Reserves & Surplus 99, , , ,518 Note: Some ratios are as per Indiabulls definitions and may not match figures Total Equity & Liabilities 1,659,610 1,805,287 2,056,230 2,285,612 declared by the Bank Please see the end of the report for disclaimer and disclosures. -4-

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