Canara Bank's operating performance to improve in remaining 9MFY16E; Buy #BrokerAdvice http://goo.gl/MD4XQ9

1. 1
BFSI
Canara Bank
Canara Bank reported stable set of operational numbers for Q1FY16 which were inline with our estimate and though there
was no big ticket NPA, slippages continue to be >3% of advances. Pre-provisioning operating profit (PPOP) increased by
11.6% YoY on back of 3.6%/8.4% increase in NII/other income and ~2% decline in operating expense. Due to higher
provisioning, PCR improved 173bps QoQ to 59.02%. We expect Canara Bank's operating performance to improve in remaining
9MFY16E on back of pickup in credit, increasing NIM and moderating operating cost. We maintain our BUY rating on the
stock with target price of INR 450, based on 0.85x FY17E ABV.
NII below our estimate due to lower credit growth
Canara Bank reported 3.6% YoY increase in NII to INR 25.17bn, which
wasbelowourestimateofINR26.55bn,primarilyduetolowercredit
growthof6.96%YoY(SPAeof10.33%)andlowerNIM.CDratiodeclined
194bps YoY to 68.68% as deposits grew by 10% YoY.
Credit growth muted but non corporate credit grew by 18%
Canara Bank reported muted credit growth of 6.96% YoY as it
continues to be cautious on lending to large corporate. However,
credit to high yielding sectors like retail, MSME and agriculture
togethergrewby18%andthesetogethernowconstitute~46.5%of
the loan book compared to 42% last year. Apart from lack of credit
demand, credit growth was also limited due to weak capital
structure of the bank (CET 1 of 7.65%).
CASA improved by 31bps YoY but declined sequentially
During the quarter, CASA ratio improved by 31bps YoY but grew
sequentially by 72bps to 23.24%. We expect CASA ratio to improve
gradually from Q2FY16 as Q2 & Q4 are best quarters in terms of
CASA mobilization and also supported by branch expansion in
last two years. During the last two years, the bank has aggressively
added branch network, 35% of the total 5708 branches were added
in last two years. We expect CASA ratio to improve to 24.5% by
FY17E driven by CASA CAGR of ~14% over FY15-17E.
NIM declined by 11bps YoY to ~2.13% due to lower spread
NIM declined by 11 bps YoY to 2.13% due to lower spread and CD
ratio. Interest rate spread declined as there was contraction in
yield on advances after cut in base rate in Q1FY16. We expect NIM
Shareholding (%) Jun-15
Promoters 64.48
FIIs 8.30
DIIs 20.65
Others 6.57
Relative Price Performance
August 07, 2015 RESULTUPDATE-Q1FY16
to improve in Q2FY16E following decline in cost of deposits due
to lower deposit rates and lower bulk deposits which declined by
47% YoY and now contributes 6.32% of total deposit compared to
13% last year.
Slippages higher at 3.1%, PCR improved to ~59%
Slippages continue to remain high at INR 25bn (3.1% of advances)
similar to ~INR 27bn quarterly run-rate in FY15. However, slippages
during the quarter was contributed mainly by SME and agriculture
sectors (~55% of slippages) while medium and large industries
contributed only ~25% of slippages. Due to higher provisioning,
PCR improved 173bps QoQ to 59.02%.
Outlook & Valuation
While operating performance of the bank is showing normalcy,
slippages continue to be high at >3% of advances, even though
there was no big ticket default during the quarter. We are also
disappointed on lack of scaling up of CASA deposit despite strong
branch addition in last two years. However, the management has
guided for stronger CASA mobilization and targets to bring cost of
deposit <7% in next quarter. We expect Canara Bank's operating
performance to improve in remaining 9MFY16E on back of pickup
in credit, increasing NIM and moderating operating cost. While
its capital adequacy at 10.75% (CET 1 of 7.65%) is relatively low,
it is adequately capitalized given weak credit demand outlook
and equity infusion program of the government. We maintain our
BUY rating on the stock with target price of INR 450, based on
0.85x FY17E ABV.
Key Data
BSE Code 532483
NSE Code CANBK
Bloomberg Code CBK IN
Reuters Code CNBK.BO
Shares O/S (mn) 475.20
Face Value 10
Mcap (INR bn) 156.39
52 Week H/L 478/254
2W Avg. Qty, NSE 3700896
Free Float (INR bn) 55.55
Beta 1.42
Y/E March (INR bn) FY14 FY15 FY16E FY17E
Interest income 395 438 479 564
Interest Expended 306 341 360 421
Net interest income 89 97 119 143
Growth (%) 13.52% 8.04% 23.10% 20.24%
NIM (%) 2.09% 2.03% 2.20% 2.31%
APAT 24 27 27 45
Growth (%) -15.11% 10.83% -0.60% 68.10%
EPS (INR) 53 57 52 88
ABV (INR) 394 363 403 514
P/ABV (x) 0.67 0.93 0.77 0.61
Net NPA 1.98% 2.65% 2.50% 1.78%
RoA 0.59% 0.57% 0.51% 0.76%
RoE 10.11% 10.40% 8.94% 13.24%
Dividend Yield 4.16% 3.11% 3.53% 3.53%
Sensex: 28282 CMP:INR312 Target: INR 450
Deepak Tewary
deepak.tewary@spagroupindia.com
Ph. No. 91 33 40114800/ 859
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CanBank Sensex

2. 2
BFSI
Source:Company, SPA Research
Other Highlights
• During the quarter, the bank restructured asset worth INR
7.19bn against management guidance of ~INR 5bn. However,
there was no slippages from standard restructured accounts
and NPA in restructured accounts declined to INR 56.67bn
compared to 58.8bn in Q4FY15. Of the total restructured
amount, infrastructure, iron & steel, textile and construction
constitutes 51%, 11%, 7% and 11% respectively.
• NetProfitdeclinedby40.6%YoYtoINR4.79bn(SPAe:INR4.83bn)
despite PPOP improving by 11.6% due to higher provisioning
for NPA, which increased by 72.5% YoY to 13.6bn. Due to higher
NPA provisioning, PCR improved 173bps QoQ to 59.02%. Non-
interest income increased by 8.4% YoY because of higher trading
profit and recovery in written-off accounts.
• Canara Bank added 26 branches and 506 ATMs during the
quarter taking the total strength of branches to 5708 and ATMs
to 9039.
• As per Basel III norms, Canara Bank's CAR stands at 10.75% at
the end of Q1FY16 with tier 1 / CET1 capital at 8.28%/7.65%.
During the quarter, Canara Bank allotted 40mn shares to LIC
at NR 380.08 after which, government's shareholding
decreased to 64.48% from 69.91%.
Quarterly Financials
Particulars(INRbn) Q1FY16 Q4FY15 Q1FY15 % YoY % QoQ
Interest Earned 111.4 111.0 107.0 4.1% 0.3%
Interest Expended 86.2 86.2 82.7 4.2% 0.1%
Net Interest Income 25.2 24.9 24.3 3.6% 1.2%
NIM (%) 2.13 2.09 2.24 (11 bps) 04 bps
Other Income 11.1 13.3 10.3 8.4% -16.1%
Net Total Income 36.3 38.1 34.6 5.0% -4.8%
Operating Expenses 16.3 20.8 16.6 -2.1% -21.8%
Paymentsto/Provisionsforemployees 10.6 11.6 10.4 2.0% -8.9%
Other operating expenses 5.7 9.2 6.2 -9.0% -38.1%
Cost/Income Ratio (%) 44.80 54.55 48.06 (326 bps) (975 bps)
OperatingProfits 20.0 17.3 18.0 11.6% 15.6%
Provisions & Contingencies 13.6 10.1 7.9 72.5% 34.7%
ProfitBefore Tax 6.4 7.2 10.1 -36.1% -10.9%
Provision for Tax 1.7 1.1 2.0 -17.5% 50.0%
NetProfit 4.8 6.1 8.1 -40.7% -21.9%
EPS 9.3 12.9 17.5 - -
Equity 5.2 4.8 4.6 - -
GNPA 130.8 130.3 81.6 60.3% 0.4%
NNPA 88.9 87.4 61.5 44.5% 1.7%
GNPA (%) 3.98 3.89 2.67 131 bps 09 bps
NNPA (%) 2.74 2.65 2.03 71 bps 09 bps
RoA (%) 0.36 0.50 0.66 (30 bps) (14 bps)
NIM to improve due to higher retail lending and repricing
of liability
0.00%
3.00%
6.00%
9.00%
12.00%
Q1FY15 Q2FY15 Q3FY15 FY15E FY16E FY17E
1.8%
1.9%
2.0%
2.1%
2.2%
2.3%
2.4%
Cost of deposit Yield on Advances NIM (RHS)
CASA impacted due to lower current deposit growth
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16
21.5%
22.0%
22.5%
23.0%
23.5%
24.0%
24.5%
25.0%
CASA Ratio (RHS) Growth in Deposit Growth in Advances
Cost/Income Ratio - decline due to no wage hike related
provisioning; expect it to stabilize ~46% in FY17E
40.0%
45.0%
50.0%
55.0%
Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16

3. 3
BFSI
Financials
Income StatementY
Y/E March (INR bn) FY14 FY15 FY16E FY17E
Interest income 395 438 479 564
Growth (%) 16.05% 10.63% 9.58% 17.72%
Interest Expended 306 341 360 421
Net interest income 89 97 119 143
Growth (%) 13.52% 8.04% 23.10% 20.24%
Other Income 39 45 49 58
Net Income 129 142 168 201
Operating Expenditure 61 73 81 92
Operating Income 68 69 88 110
Provisions & Contingencies 37 35 50 45
PBT 31 35 38 64
Tax 6 8 11 19
PAT 24 27 27 45
Extra-ordinary Items 0 0 0 0
APAT 24 27 27 45
Growth (%) -15.11% 10.83% -0.60% 68.10%
EPS (INR) 52.86 56.86 52.13 87.63
Balance Sheet
Y/E March (INR bn) FY14 FY15 FY16E FY17E
SOURCES OF FUNDS
Equity Share Capital 4.6 4.8 5.2 5.2
Reserves 292 313 350 391
Total Shareholders Funds 296 318 356 396
Total Deposits 4207 4738 5293 6007
Growth (%) 18.23% 12.63% 11.70% 13.50%
Borrowings 272 257 165 336
Other Liabilities & Provisions 147 166 243 180
Total Liabilities 4923 5479 6057 6920
APPLICATION OF FUNDS
Current Assets 448 486 439 496
Investments 1268 1453 1678 1904
Advances 3011 3300 3729 4289
Growth (%) 24.32% 9.62% 13.00% 15.00%
Fixed Assets 66 69 77 85
Other Assets 129 170 133 146
Total Assets 4923 5479 6057 6920
Key Ratios
Y/E March (INR bn) FY14 FY15 FY16E FY17E
Per Share Data (INR)
EPS 52.86 56.86 52.13 87.63
BVPS 642.16 668.50 690.12 768.62
ABVPS 393.63 362.76 402.68 513.76
DPS 11.00 10.50 11.00 11.00
Profitability Ratios
Yield on Advances 10.62% 10.72% 10.22% 10.22%
Cost of Deposits 7.49% 7.41% 7.01% 7.00%
Net Interest Margin 2.09% 2.03% 2.20% 2.31%
RoA 0.59% 0.57% 0.51% 0.76%
RoE 10.11% 10.40% 8.94% 13.24%
Balance Sheet Ratios
Credit/Deposit Ratio 71.56% 69.65% 70.46% 71.39%
Investment/Deposit Ratio 30.15% 30.67% 31.70% 31.70%
CASA Ratio 24.55% 23.96% 24.21% 24.50%
Capital Adequacy Ratio (CAR) 10.63% 10.56% 9.99% 9.59%
Tier I 7.68% 8.02% 7.75% 7.65%
Aseet Quality Ratios
Gross NPA 2.51% 3.95% 3.75% 2.83%
Net NPA 1.98% 2.65% 2.50% 1.78%
Provision Coverage Ratio 60.11% 57.29% 58.85% 62.82%
Slippage Ratio 3.91% 3.29% 2.50% 1.00%
Efficiency Ratios
Cost to Income Ratio 47.22% 51.10% 47.82% 45.63%
Business per Employee (in INR mn) 147.93 148.92 156.69 168.29
Profit per Employee (in INR mn) 0.50 0.50 0.47 0.74
Valuation Ratios
P/E(x) 5.00 5.94 5.98 3.56
P/ABV (x) 0.67 0.93 0.77 0.61
Dividend Yield 4.16% 3.11% 3.53% 3.53%

4. 4
BFSI
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