Stock Market Result Update on Canara Bank for 2QFY2012

Stock Market Result Update on Canara Bank for 2QFY2012 with an Accumulate recommendation and a Target Price of `510 (12 months).

For 2QFY2012, Canara Bank registered a 15.4% yoy decline in its net profit, in-line with our expectations. However, provisioning expenses were considerably higher than expected – offset by stronger NII and healthy rise in other income (driven by recoveries from written-off accounts and higher trading profits). We maintain our Accumulate recommendation on the stock.

NIM improves in-line with peers; slippages remain elevated but largely offset by higher recoveries and aggressive write-offs: For 2QFY2012, the bank’s overall business momentum remained moderate, with advances increasing marginally by 1.4% qoq (up 23.8% yoy) and deposits accretion rising by 4.1% qoq (up 25.4% yoy). Saving account deposits growth was relatively healthy at 17.9% yoy; however, the 5.3% yoy decrease in current account balances pulled down overall CASA deposits growth to 12.2% yoy. Calculated CASA ratio improved, albeit marginally by 50bp qoq, to 25.8% (down 305bp yoy). A relatively faster (22bp qoq) rise in yield on advances vis-à-vis an 8bp qoq rise in cost of deposits led to a 22bp sequential improvement in reported NIM to 2.6%. Other income growth was robust 65.8% yoy, driven by doubling of recoveries from written-off accounts and substantially higher trading profits. On the asset-quality front, slippages continued to remain at elevated levels as the bank completed the migration to system-based NPA recognition platform. However, the rise in NPAs was largely contained on the back of higher recoveries and aggressive write-offs. Gross and net NPA ratios remained largely stable at 1.73% and 1.43%, respectively.

Outlook and valuation: Incremental asset-quality pressures are expected to moderate going forward, as the bank has completed the migration to system-based NPA recognition platform. Also, recoveries and upgrades especially from the recent slippages are likely to pick up going forward, as witnessed in 2QFY2012. At the CMP, the stock is trading at reasonable valuations, in our view, of 0.9x FY2013E ABV. Hence, we maintain our Accumulate recommendation on the stock with a target price of `510.