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Canara Bank: Can this Jhunjhunwala bet beat its industry peers?

The bank’s cautious approach to lending and focus on increasing CASA deposits give it a positive outlook, but its performance is still below its peers and prospects will depend upon performance in the coming quarters.

July 28, 2023 / 10:05 AM IST
Canara Bank

Primed for re-rating?

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Two years ago, the late ace investor Rakesh Jhunjhunwala increased his stake in Canara Bank  after stating that PSB stocks are “horribly undervalued,” and his spouse Rekha Jhunjhunwala has stuck with the bet since then. In fact, she increased her holdings of the public sector bank this year and her stake in the bank was 2.07 percent as of June end.

Jhunjhunwala’s conviction is shared by many, and investors have grown fond of public sector bank shares in general over the past one year. That explains the massive outperformance of the Nifty PSU Bank index vis-à-vis the broader Nifty 50. The banking index has galloped 64 percent in the past one year against Nifty’s 19 percent. Even in the past month, public sector bank shares have been investors’ bargain-hunting ground.

Canara Bank’s share price has gained 50 percent in the past year, but it hasn’t been able to outpace its peers. It still trades below its one-year forward book value and analysts do not expect any change or re-rating here. Canara Bank has not received the same treatment as the largest lender, State Bank of India (SBI), or Bank of Baroda that trade slightly above or at their one-year forward book value and are the top public sector bank picks of several brokerages.

Analysts at Kotak Institutional Equities and JM Financial have put the fair value of the stock at 0.8 times estimated one-year forward book value while those at Emkay Global Financial Services Ltd have assigned a fair value at 0.9 times.

But Canara Bank’s chief is making all the right noises about risk and growth that would be music to the ears of investors.  The rerating odds have also increased.

Underwriting right risks

Bankers have warned that instances of mispricing of risk have been found in corporate loans amid a rise in private capex and the rush to lend to large companies.

Canara Bank’s Managing Director and Chief Executive Officer, K Satyanarayana Raju, wants to be measured and cautious in lending. “We are not keen on competing with other banks for topline growth,” he told Moneycontrol in an interview. “We would not lend at throwaway prices.”

Also read:

MC Interview: Canara Bank is focused on CASA growth, says MD Raju

This is a departure from the typical trend of wholesale bankers which indicated growth as the top priority. The fallout of the approach has been a punishing bad loan cycle. Raju expressed caution not just on corporate lending but also the unsecured personal loan space that has had banks fight it out for market share. “We are sanctioning personal loans only to existing customers and only to those that have salaried accounts with us. We don’t want to go too aggressively here,” Raju told reporters in his interaction post quarterly results on July 24.

Analysts believe that the bank has enough levers in place for growth and enough provisioning against risks. JM Financial is expecting credit costs to be contained at 120 basis points (bps) in the FY24-FY25 period. The lender reported credit costs of 110 bps for Q1FY24. A basis point is one-hundredth of a percentage point.

Hits and misses in Q1 

Canara Bank’s strength was its asset quality in the first quarter which helped it report the highest ever quarterly net profit. The pile of delinquencies has dropped steadily and fell 16.4 percent year-on-year in April-June of FY24. What’s more is that loans that show early stress, known as special mention accounts (SMA), also reduced, indicating that the bank has improved its risk underwriting. At the end of June, bad loans were 5.15 percent of the lender’s loan book, down from 6.98 percent a year ago. The upshot is that return on equity and return on assets have improved and analysts believe there will be more improvement in the coming quarters. “The healthy trend on bad debt recoveries is likely to continue for some more time given the large bad asset pool carried by the bank. Along with this, a high financial leverage will ensure the bank delivers mid-to-high teen RoEs over the medium term,” analysts at Kotak Institutional Equities wrote in their note.

Also read:

Canara Bank Q1 results | Net profit rises 74.8% to Rs 3,535 crore

But the bank fared poorly when it came to deposits and loan growth was lower than peers that have declared results so far. Its advances grew 13 percent year-on-year and deposits huffed and puffed at a mere 6 percent. Raju says the lender has several measures in mind to boost deposit growth, especially low-cost current and savings account (CASA). The bank is targeting an increase in the share of CASA in overall deposits to 35 percent by end of FY24 from the current 33 percent. “During the rest of the year, we will be introducing (CASA) products specifically for women and also products for pensioners,” he told Moneycontrol.

Even so, Canara Bank’s CASA ratio doesn’t match up to its peers such as Punjab National Bank (42 percent for Q1), Bank of Baroda, and even Bank of India. This increases the pressure on its margins in the coming quarters compared to others. With 80 percent of repricing of corporate loans complete, the lender has little room to boost yields. That said 52 percent of its loan book is priced off MCLR (marginal cost-based lending rate) which gives it flexibility to increase lending rates.

The trajectory of its margins in the coming quarters would be one of the main contributors to a rethink on its valuation by analysts. Also, investors would wait for proof on the bank’s claim of superior risk underwriting through asset quality metrics. For FY24, though, Canara Bank has all the ingredients for further upside.

Aparna Iyer
first published: Jul 28, 2023 10:05 am

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