Saturday, May 9, 2009

>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

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