>Canara Bank (ICICI Securities)

Canara Bank’s Q4FY09 net profit growth was robust at 55% YoY, driven by strong 41.5% YoY NII growth and high trading gains at Rs3.5bn. Despite ~Rs4bn still being classified as NPAs related to the Dabhol power project, GNPAs improved substantially 38bps QoQ to 1.56%. Restructured assets at Rs20.7bn (1.5% of total advances) were a positive surprise. We raise FY10E & FY11E estimates 16% and 14.6% respectively to reflect improved margin sustainability and traction in other income. We upgrade Canara Bank to BUY with target price of Rs252/share (FY10E P/BV of 0.9x). The stock trades at FY10E P/E of 4.4x & P/BV of 0.7x. Sharp rise in NPAs is the key risk to our call.

■ Advances growth to moderate; margins to sustain. High 29% YoY advances growth in Q4FY09 was driven by 65% YoY & 28% YoY rise in credit to corporate & SMEs respectively. NIMs rose 36bps YoY to 2.78% driven by 57bps YoY rise in yield on advances to 10.79%, while cost of deposits rose only 7bps YoY to 6.87% in Q4FY09. We expect the fall in cost of deposits to aid healthy NII CAGR of 17.9% through FY09-11E. NIMs are likely to sustain at 2.4% through FY11E.

■ Other income high on trading gains; costs rise. Other income growth at 18.5% YoY was driven by high trading profits of Rs3.5bn (versus Rs1bn in Q4FY08) and healthy core fee income growth of 20.7% YoY in Q4FY09. Operating expenses rose 26% YoY due to 48.6% rise in staff costs on Rs1.5bn provision for wage revision, leading to QoQ increase in cost-to-income ratio to 41% in Q4FY09.

■ Asset quality improved; restructured assets low. Asset quality improved substantially with GNPAs declining 38bps QoQ to 1.56%. Restructured advances at Rs20.7bn (~1.5% of total advances) were much lower than expected, surprising us on the upside. Given that the bank has maintained ~Rs4bn of Dabhol power project as NPA, the sharp QoQ improvement is commendable. Provisions were lower 5.7% YoY despite provisions on restructured assets. We model loan loss provisions at 100bps each for FY10E and FY11E.

■ Upgrade to BUY on improved earnings visibility. Canara Bank’s core operating profit growth of 10.2% and sharp improvement in asset quality are directionally positive. We expect sustained margins and traction in other income to be key earning drivers through FY11. We raise FY10E & FY11E estimates 16% & 14.6% respectively to reflect improved margin sustainability. The stock trades at FY10E P/E of 4.4x & P/BV of 0.7x. We upgrade Canara Bank to BUY with revised target price of Rs252/share (FY10E P/BV of 0.9x). Sharp rise in NPAs is the key risk to
our call.

To see full report: CANARA BANK