CMP = Rs 251 (as of Friday)
Price target: Rs 268
Result highlights
- Canara Bank's results have been much above our and market expectations with the profit after tax (PAT) reporting a growth of 2.3% to Rs505 crore compared with our estimate of a 10% year-on-year (y-o-y) decline to Rs 444 crore.
- The profit growth was higher than expected mainly due to a substantial jump in the non-interest income driven by a higher treasury income and cash recoveries.
- The net interest income (NII) was up by 11.3% year on year (yoy) and 5.5% quarter on quarter (qoq) to Rs1,014 crore compared with our estimate of Rs 1,030 crore.
- The non-interest income zoomed by 58% yoy and 120% qoq to Rs 626.2 crore, primarily driven by a 172% y-o-y and 186% sequential growth in the trading income to Rs 92 crore.
- The miscellaneous income, which increased by 57% yoy and 247% qoq to Rs343 crore, also contributed to the growth in the non-interest income.
- The operating expenses grew by a marginal 1% yoy to Rs633 crore. The operating profit was up by 48% yoy and 65% qoq to Rs1,007 crore, driven primarily by the higher non-interest income.
- A higher standard asset provisioning requirement also kept the provisions elevated as the non-performing asset (NPA) provisions declined by 67% yoy to Rs102 crore from Rs306 crore in Q4FY2006. Although the operating profit increased by 48% yoy, yet the higher provisions restricted the overall profit growth to 2.3%.
- Higher cash recoveries to the tune of Rs1,025 crore during the year as against Rs972 crore during the previous financial year helped the bank to bring down its gross NPAs. In absolute terms, the gross NPAs have reported a sequential decline of Rs 380 crore while the net NPA ratio has declined sequentially from 0.96% to 0.94%.
- The margins may remain under slight pressure, however the business growth is likely to boost the NII. The bank has also reduced the interest rate risk on its book by bringing down the duration of its "available-for-sale" category to 2.48 years from 3.76 years earlier and stated that the duration is expected to further come down below two years.
- At the current market price of Rs 251, the stock is quoting at 6.6x its FY2008E earnings per share, 3.3x pre-provisioning profits and 1.1x FY2008E book value.
- I maintain Buy recommendation on the stock with a price target of Rs 268.
