We maintain ‘neutral’ on Canara Bank and assign a target price of R305 a share. While valuations at 0.5x FY15e BV appear low, we remain concerned about strong loan growth leading to faster consumption of capital (CET 1 at 7.4% versus 8.5% in Q1FY14) without commensurate growth in revenues.
While headline asset quality reflected strong improvement, it was helped by one-offs and fresh impairments remain high. Further, a restructuring pipeline of R3,000 crore doesn’t provide comfort. Low Casa ratio (26%), high share of infra loans (19%) and capital constraint will keep stock performance under pressure.
We expect earnings CAGR of more than 10% over FY14/16. Sensitivity of earnings and credit cost has increased significantly. A 10-bps change each in NIM and credit cost could impact earnings by ~15% and ~10%.
Canara Bank’s Q4FY14 PAT of R610 crore (down 16% y-o-y) was 49% above estimate, driven by one-off interest on IT refund of R110 crore (adjusted NII up 16% y-o-y, versus reported NII growth of 21% y-o-y), along with strong fees (R660 crore; 11% above estimate) and provisions write-back of R230 crore.
Canara Bank did additional provision of R80 crore for wage revision. Slippages were elevated at R2,140 crore (versus Rs2,100 crore in Q3FY14).