Recommendation: Buy
CMP = Rs 237
Price target: Rs 315
Key points:
- Canara Bank has reported a profit after tax (PAT) of Rs 464.1 crore for Q4FY2008, reflecting a decline of 8.1% yoy. The reported PAT is marginally above our expectation of Rs 451.1 crore. The top line performance is disappointing with the net interest income (NII) declining by 12.9% yoy to Rs 922.5 crore owing to pressure on the margins and a muted advances growth.
- The non-interest income provided some relief with a 14.1% growth yoy. The operating expenses grew by 10.1% to Rs 697.6 crore during the quarter. The growth in the operating expenses can be traced to a 30.9% jump in the other operating expenses. Meanwhile, the staff expenses declined by 4.3% yoy. Despite the other income growth coupled with lower operating expenses, the pre-provisioning profit was down 10.7% yoy.
- Notably, the provisions continued their declining trend. The provisions and contingencies stood at Rs 375.1 crore, down 24.5% yoy. The lower provisions coupled with a positive growth in the non-interest income helped the bank check the decline in the profitability.
- The asset quality of the bank remained healthy with an improvement on absolute and relative basis. The gross non-performing asset (GNPA) percentage came in at 1.31%, down 20 basis points yoy, while the net non-performing asset (NNPA) percentage was down 10 basis points to 0.84%.
- The capital adequacy ratio was healthy at 13.25% as at end of March 2008, largely in line with the year-ago level of 13.50%. Growth in advances was muted at 8.9% as the bank focused on rebalancing its advances book. In line, the deposit growth was muted at 8.2% yoy.
- At the current market price of Rs 237, Canara Bank trades at 5.4x 2009E earnings per share, 2.9x 2009E pre-provisioning profit and 1.0x 2009E book value.
- I maintain Buy recommendation and price target of Rs 315 on the stock.
