Canara Bank

Investors with a two-three-year perspective can consider buying shares of Canara Bank on the back of encouraging results for FY-09, with growth primarily driven by its core business.

High credit growth, improved margins and higher treasury income helped the bank post a net profit growth of 32 per cent for the year ended March-09.

A strong branch network, high proportion of non-interest income (58 per cent of operating profit), an adequately capitalised advance book, significant undiluted government holding and improving profitability ratios are key positives for the bank.

While the Canara Bank share has underperformed most of its public sector peers over the past year, it has gained 32 per cent in the last one month, placing it among the top gainers in the banking space in the current rally.

Investors may, therefore, consider buying the stock on declines linked to the broad market.

At the current market price of Rs 224, the stock trades at a FY-09 price-earning multiple of 4.43 and less than its March-end book value of Rs 244.

Canara Bank posted higher-than-industry-average growth in advances (29 per cent) for 2008-09.

Nevertheless, its position was taken by Bank of Baroda as the third largest public sector bank in terms of business, measured as a sum of advances and deposits.

One of the reasons may be due to Canara Bank’s sluggish rate of growth in business (8.4 per cent) in 2007-08 against 24 per cent growth attained by Bank of Baroda.

In 2008-09, Canara Bank’s business grew by 24 per cent while that of Bank of Baroda’s by 32 per cent.

The sluggish growth in FY-08 was a conscious attempt by the bank to reduce the proportion of bulk deposits and rebalance the advance portfolio to concentrate on productive sectors.
Advances and Deposits

Canara Bank has a diversified loan book with industrial loans forming 37 per cent of net advances, retail loans 14.3 per cent, agriculture 14.5 per cent and MSME 17 per cent. Canara Bank has high exposure to the infrastructure sector with 12.5 per cent of net advances.

The bank’s deposits grew by 21 per cent. Its low-cost deposit proportion has fallen to 30.7 per cent from 32.3 per cent. This decline, coupled with high deposit rates prevailed during the first nine months of the fiscal (which depositors have locked into), led to a marginal increase in cost of deposits from 6.8 per cent to 6.87 per cent.
Margins improve

The bank has improved the credit-deposit ratio to 73.9 per cent from 69.6 per cent, an indication of improving margins what with funds being deployed in high yielding assets.

The net interest margin (NIM) for the bank also improved due to the CRR cut, resulting in better availability of funds. The NIM improved from 2.42 per cent to 2.78 per cent; this is a significant jump.
Financials

The bank’s net profit grew at 16 per cent compounded annually over the last five years. It posted a net profit growth of 55 per cent for the March 2009 quarter and 32 per cent for the fiscal year 2008-09. High profit growth for the year was aided by growth in lending activity which, in turn, boosted the net interest income (33 per cent growth).

Non-interest income saw a modest growth of 4.4 per cent due to the fall in dividend income from the various subsidiaries and joint ventures.

The fee income, however, grew at a healthy rate of 18 per cent. The other component of non-interest income — trading income — increased by 55 per cent in a year. The sustainability of this income segment will depend on gilt yields.

Canara Bank managed to contain the increase in its operating expenses to 9 per cent in FY-09. It has improved it cost-income ratio from 48.5 per cent to 43 per cent over a year displaying improved operating efficiency.
Asset quality

Gross NPAs have increased by 70 per cent in absolute terms. After provisions, net NPA ratio has risen from 0.84 per cent to 1.09 per cent.

The rise in NPA was primarily due to the bank’s exposure to Dabhol project (around Rs 400 crore) which was classified as NPA.

Provision coverage is around 30 per cent which continues to be among the lowest and may affect the bank if the current economic scenario persists.

The Bank has restructured 1.5 per cent of its advance which would be treated as standard asset. This restructuring is among the lowest compared to some of its public sector peers.

The Bank is adequately capitalised (14.05 per cent). The Government owns 73 per cent stake leaving more room for raising capital in future.
Outlook

The return on equity improved to 22.6 per cent from 19.08 per cent and return on assets from 0.92 per cent to 1.06 per cent showing improved profitability for the bank. Credit growth envisaged by the Bank is 26 per cent, but given the current slowdown, meeting such targets may happen at the cost of asset quality slippages.

In a falling interest rate regime, margin contraction is also possible as yield on advances may fall steeper than cost of deposits.

The Bank has cut its prime lending rate by two percentage points while cutting the deposit rates on various maturities by three percentage points.

However, rate cuts from this level may not attract many depositors who may resort to other debt options coupled with tax relief.

While interest income may continue to grow in line with the credit growth, fee income may help improve performance.

Higher branch roll-out (200 branches), large ATM network and successful implementation of Core Banking Solutions (CBS) may help in getting more low-cost deposits and improve fee income but the costs may surge this fiscal due to roll-out of new branches, fresh recruitments and implementation of CBS.

Only 38 per cent of the branches and 77 per cent of the business is under CBS.