Target: ₹350
CMP: ₹302.80
Canara Bank reported a strong beat on PAT at ₹3,170 crore (vs. our estimate of ₹2,830 crore), mainly led by healthy margins (3.07 per cent) and recovery from w-off loans (₹2,170 crore).
Credit growth moderated to 18 per cent y-o-y/2 per cent q-o-q, which the bank expects would moderate further in FY24, given the macro slowdown. However, the bank expects margins to hold up in FY24 (FY23: 2.95 per cent), as MCLR repricing would largely offset the increase in CoF.
Separately, the bank disclosed gross ECL provisioning requirement of ₹42,000 crore (5 per cent of loans/7 per cent of RWA), based on RBI’s draft guidelines, which seem to be higher than expected. Given the higher hit on capital for Canara Bank and for other PSBs, even on a staggered basis (5 years), we believe the norms could be deferred/diluted.
We have cut our earnings by 1-8 per cent for FY24-25 and introduced FY26 estimates, factoring in higher LLP. We have also cut our target price to ₹350 (vs. ₹385/share earlier), based on 0.8x its Mar-25E ABV and subsidiary/investment value of ₹27.
We have lowered our rating on the stock to Hold from Buy.