Canara Bank. CMP: INR419 TP: INR525 Buy

BSE SENSEX S&P CNX 18,817 5,724 Bloomberg CBK IN Equity Shares (m) 443.0 52-Week Range (INR) 566/349 1,6, 12 Rel.Perf.(%) -7/-18/-17 M.Cap. (INR b) 170.3 M.Cap. (USD b) 3.0 7 November 2012 2QFY13 Results Update Sector: Financials Canara Bank CMP: INR419 TP: INR525 Buy Canara Bank (CBK) reported 22% YoY decline in 2QFY13 PAT to ~INR6.6b, 10% below estimates. While NII surprised positively (3% higher than estimates), sharp fall in non-interest income (20% below our estimate; down 26% YoY and 12% QoQ) led to lower than expected profitability. Key highlights: Gross slippages remained at an elevated level of INR19b (INR15b in 1QFY13). Of the total slippages, INR12.2b was contributed by five corporate accounts having exposure of more than INR1b each. CBK restructured INR6b (~25bp of overall loans), of which a large part (INR5.5b, with three corporate accounts contributing INR4.4b) belonged to the large corporate division. Adjusted for Air India (AI) and SEBs, outstanding restructured loans stood at 3.6% of overall loans. Other highlights: (1) NIM improved ~15bp QoQ to 2.53%, despite higher slippages and significant increase in liquidity on the balance sheet, (2) Loans declined 1% YoY and 5% QoQ, deposits grew moderately by 8% YoY and remained flat QoQ, (3) Reported CASA ratio improved to 25.7% v/s 24.1% in 1QFY13. Valuation and view: Despite higher slippages and build-up of liquidity, QoQ improvement in NIMs is positive. With a low CD ratio of 64% and higher proportion of AFS portfolio (40%) with high duration (3.8 years), CBK can surprise positively on earnings front, provided slippages are contained at current levels. Maintain Buy. Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com) + 91 22 3982 5415 Sohail Halai (Sohail.Halai@motilaloswal.com)+ 91 22 3982 5430 Investors are advised to refer through disclosures made at the end of the Research Report. 1

Quarterly performance: Below estimates (INR m) Y/E March 2QFY13A 2QFY13E Var. (%) Comments Net Interest Income 19,568 19,006 3 Better than expected performance on margins, Balance % Change (YoY) 0-3 sheet growth remains moderate Other Income 6,081 7,542-19 Muted performance across line items Net Income 25,649 26,548-3 Operating Expenses 12,828 12,578 2 Operating Profit 12,821 13,970-8 % Change (YoY) -20-13 Other Provisions 4,211 4,800-12 MTM reversals leading to lower provisions Profit before Tax 8,610 9,170-6 Tax Provisions 2,000 1,834 9 Tax rate higher than expected Net Profit 6,610 7,336-10 Weak non interest income and higher tax rate % Change (YoY) -22-14 Source: Company/MOSL Net slippages higher, but additional restructuring lower than peers In 2QFY13, gross slippages remained at an elevated level of INR19b (annualized slippage ratio of 3.5% v/s INR15b in 1QFY13). Upgradations and recoveries were largely stable at INR6.45b v/s INR6.6b a quarter ago. Of the total slippages, INR12.2b was contributed by five corporate accounts having exposure of more than INR1b each. One account (INR2.2b exposure) that got restructured has been upgraded during the quarter. Higher net slippages and lower write-offs led to ~25% QoQ increase in GNPA. PCR (including technical write-offs) was 63.02% v/s 66.5% a quarter ago. CBK restructured INR6b (~25bp of overall loans), of which a large part (INR5.5b, with three corporate accounts contributing INR4.4b) belonged to the large corporate division. Outstanding restructured loans stood at INR149b (6.9% of overall loans; facility-wise), of which INR55b is on account of SEBs and INR15b is on account of Air India (AI). Adjusted for these, outstanding restructured loans are 3.6% of overall loans. Of the restructured loans, ~INR112b have already slipped into NPA. Thus, outstanding restructured loans (ex SEBs and AI) stand at 3.1% of overall loans. Balance sheet consolidation continues; Margins improve QoQ CBK continued with its strategy of consolidating its balance sheet in an uncertain environment, which is a welcome move, considering weak liability structure and higher share of power sector loans. Loans declined 1% YoY and 5% QoQ. Deposit growth remained moderate (up 8% YoY; flat QoQ). NIM expanded ~15bp QoQ to 2.53%, despite higher slippages and significant increase in liquidity in the balance sheet. CD ratio declined further to 64% v/s 67.5% a quarter ago. Excess liquidity in the balance sheet is parked in G-Sec; as a result, SLR has increased to 34% v/s 31% a quarter ago. Other highlights Reported CASA ratio improved to 25.7% from 24.1% a quarter ago. CASA deposits grew 7% QoQ and 3.4% YoY, led by 6% QoQ and 10% YoY growth in SA deposits. Investments grew ~22% YoY and ~8% QoQ, within which share of the AFS portfolio increased to 37% v/s 30.5% in FY12 and 2QFY12. Further, AFS duration has also increased to 3.8 years from 3.2 years a quarter ago. Fee income growth remains sluggish (declined 12% YoY and ~10% QoQ). Tax rate stood at 23% v/s 20.5% in 1QFY13. 7 November 2012 2

Valuation and view Despite higher slippages, higher liquidity build-up and increase in G-Sec, 15bp QoQ improvement in NIM is a positive. With a low CD ratio of 64% and higher proportion of AFS portfolio (40%) with high duration (3.8 years), CBK can provide positive earnings surprises in the following quarters, provided slippages do not increase significantly from current levels. While stress addition was higher than previous quarters, performance during the quarter was better than peers. Some of the accounts added during the quarter are lumpy and may get upgraded during 2HFY13. Over the last five quarters, CBK's loans have remained flat, which is comforting. Nevertheless, continued balance sheet and fee income moderation, and higher net slippages have led to earnings downgrade of ~10% for FY13 and ~5% for FY14. The stock trades at 0.8x FY13E BV of INR519 and 0.7x FY14E BV of INR587. Maintain Buy with a target price of INR525 (0.9x FY14E BV). Key Risks: (a) higher share of Infrastructure portfolio, (b) weak liability profile (lower CASA ratio of ~25% and higher share of bulk deposits of ~27%), and (c) possible negative surprises post management change. Weak non interest income and asset quality perf. leading to downgrade (INR b) Old Estimates Rev. Estimates Change (%) FY13 FY14 FY13 FY14 FY13 FY14 Net Interest Income 79.4 98.2 81.4 100.4 2.5 2.3 Other Income 32.2 35.6 27.7 32.0-14.0-10.2 Total Income 111.6 133.8 109.1 132.4-2.3-1.0 Operating Expenses 52.4 58.8 53.2 60.8 1.5 3.3 Operating Profits 59.2 75.0 55.9 71.7-5.5-4.4 Provisions 18.4 27.7 19.3 26.7 5.0-3.6 PBT 40.8 47.3 36.6 45.0-10.3-4.9 Tax 8.2 9.5 7.3 9.0-10.3-4.9 PAT 32.6 37.9 29.3 36.0-10.3-4.9 Margins (%) 2.2 2.3 2.2 2.4 Credit Cost (%) 0.8 0.9 0.8 0.8 RoA (%) 0.8 0.8 0.7 0.8 RoE (%) 14.9 15.2 13.4 14.7 Source: MOSL Canara Bank: One year forward P/E Canara Bank:One year forward P/BV 7 November 2012 3

Quarterly trends Loan growth continues to moderate Deposit growth flat QoQ Focus on consolidating and de-bulking balance sheet YTD deposit growth at 3% as compared to 7% decline in loan portfolio CD ratio declines substantially (%) CASA Ratio improves QoQ (%) CD ratio falls further, excess liquidity is parked in G-Sec; as a result, SLR has increased to 34% v/s 31% in 1QFY13 Focus on core deposits and reducing proportion of bulk deposits is yielding results; SA deposits grew by 6% QoQ Fee income remains under pressure Trading gains decline QoQ (INR m) Decline in loan portfolio and a challenging macro environment have led to sharp moderation in fee income in the last two quarters Higher proportion of AFS portfolio (40%) with high duration (3.8 years) could lead to significant benefit once interest rate starts falling 7 November 2012 4

Quarterly trends (continue...) Cost to income ratio increased QoQ (%) Credit cost remains high (%) Weak fee income and increase in other opex (+23% QOQ) led to increase in cost to income ratio Credit cost remains elevated on the back of higher slippages Slippages increased QoQ in line with industry (INR b) GNPA up 25% QoQ Of the total slippages, INR12.2b was contributed by five corp. accounts having exposure of more than INR1b each. Some of the accounts added to stressed assets during the quarter are lumpy and may get upgraded during 2HFY13 GNPA break-up (%) Fresh addition of INR6b in 2QFY13 (INR b) Share of Agri NPAs in overall NPAs declined to 16% from 21% in 1QFY13 Adjusted for restructuring of SEBs and Air India, outstanding standard restructured loans are 3.1% of overall loans as compared to the reported 6.4% 7 November 2012 5

Quarterly Snapshot FY12 FY13 Variation (%) Cumulative Numbers 1Q 2Q 3Q 4Q 1Q 2Q QoQ YoY 1HFY12 1HFY13 YoY Gr (%) Profit and Loss (INR m) Net Interest Income 17,688 19,617 19,186 20,402 18,435 19,568 6 0 37,305 38,003 2 Other Income 5,510 8,228 7,791 7,693 6,926 6,081-12 -26 13,738 13,007-5 Trading profits -770 1,490 1,570 950 988 740-25 -50 720 1,728 140 Forex Income 960 1,070 1,010 1,310 1,299 920-29 -14 2,030 2,219 9 Recoveries 617 1,350 680 980 468 640 37-53 1,967 1,108-44 Core Fees 4,703 4,318 4,531 4,453 4,171 3,781-9 -12 9,021 7,952-12 Total Income 23,198 27,845 26,976 28,094 25,362 25,649 1-8 51,043 51,010 0 Operating Expenses 10,495 11,847 11,209 13,187 11,424 12,828 12 8 22,342 24,252 9 Employee 6,677 7,670 7,125 8,259 7,430 7,911 6 3 14,347 15,341 7 Others 3,818 4,177 4,084 4,928 3,994 4,917 23 18 7,995 8,911 11 Operating Profits 12,703 15,998 15,767 14,907 13,938 12,821-8 -20 28,702 26,759-7 Provisions 3,446 5,477 5,012 4,616 4,185 4,211 1-23 8,922 8,397-6 NPA provisions 2,850 4,768 1,420 3,900 4,770 4,444-7 -7 7,618 9,214 21 Provisions on Invst. 95 609 1,850-1,070-2,050-1,203-41 N.A. 704-3,253 N.A. Others 500 100 1,742 1,786 1,465 970-34 N.A. 600 2,435 306 PBT 9,258 10,522 10,756 10,291 9,752 8,610-12 -18 19,780 18,362-7 Taxes 2,000 2,000 2,000 2,000 2,000 2,000 0 0 4,000 4,000 0 PAT 7,258 8,522 8,756 8,291 7,752 6,610-15 -22 15,780 14,362-9 Asset Quality GNPA 36,063 37,933 39,986 40,318 44,966 56,095 25 48 NNPA 28,711 31,170 32,654 33,863 37,556 45,686 22 47 GNPA (%) 1.7 1.7 1.8 1.7 2.0 2.6 60 84 NNPA (%) 1.3 1.4 1.5 1.5 1.7 2.1 46 69 PCR (Calculated, %) 20.4 17.8 18.3 16.0 16.5 18.6 208 73 PCR (Reported, %) 69.5 68.6 67.9 67.6 66.5 63.0-348 -560 Slippages 13,730 12,360 8,620 11,210 14,970 19,220 Slippage Ratio 3.2 2.8 1.8 2.1 2.8 3.5 Credit Cost 0.5 0.9 0.3 0.7 0.8 0.8-3 -8 Restructured loans* 39,700 39,970 47,280 78,960 140,559 148,949 6 273 % to Loans 1.8 1.8 2.2 3.4 6.2 6.9 67 507 Ratios (%) Fees to Total Income 20.3 15.5 16.8 15.8 16.4 14.7 17.7 15.6 Cost to Core Income 46.9 49.5 47.3 53.1 50.5 54.9 48.2 52.8 Tax Rate 21.6 19.0 18.6 19.4 20.5 23.2 20.2 21.8 CASA (cal) 25.4 25.8 23.9 24.3 23.3 24.8 Loan/Deposit 71.6 69.7 69.5 71.1 67.4 64.1 CAR 13.4 12.8 13.2 13.8 13.2 13.1 Tier I 9.6 9.2 9.5 10.4 10.1 10.1 Margins - Cumulative (%) Yield on loans 10.5 10.7 10.9 10.9 11.1 11.2 8 48 Yield On Investments 7.9 7.9 7.9 8.0 8.1 8.1 3 24 Cost of Deposits 7.1 7.1 7.3 7.4 7.9 7.8-6 70 Margins 2.4 2.5 2.5 2.5 2.4 2.5 7-4 Balance sheet (INR b) Loans 2,150 2,179 2,193 2,325 2,256 2,158-4 -1 Deposits 3,002 3,126 3,155 3,271 3,346 3,368 1 8 CASA Deposits 761 808 754 796 779 836 7 3 Savings Deposits 609 640 634 648 665 705 6 10 Current Deposits 152 167 121 148 114 131 15-22 Investments 861 991 939 1,021 1,123 1,207 8 22 For %age change QoQ and YoY is bp Source: Company, MOSL 7 November 2012 6

Stock Info EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY13 66.1 77.2-14.4 FY14 81.2 90.2-9.9 1-year Sensex rebased Shareholding pattern (%) Sep-12 Jun-12 Sep-11 Promoter 67.7 67.7 67.7 Domestic Inst 12.4 11.1 10.9 Foreign 13.3 14.8 14.6 Others 6.6 6.4 6.7 7 November 2012 7

Financials and Valuation 7 November 2012 8

Financials and Valuation 7 November 2012 9

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