While the funds raised will augment its capital and support expansion plans, analysts estimate the bank’s margins to decline, capping upsides in the stock.
Canara Bank’s move to issue equity shares to institutional investors, garnering $442 million (Rs 1,993 crore) was well received by the markets. Shares of Canara Bank jumped 4 per cent on Wednesday, against the gains of just 1 per cent posted by the benchmark index. On Thursday, too, while Sensex fell by 1.14 per cent, the bank’s stock fell by less than a per cent.
The QIP (qualified institutions placement) issue will enable the bank to cater to the growing credit demand and fund its expansion plans. These put together should, in turn, help the bank sustain robust growth rates as seen in the past. The flip side is, analysts believe the bank’s relatively lower Casa ratio leaves it vulnerable to contraction in net interest margins (NIMs) in a rising interest rate scenario and could affect its profit growth, limiting upsides in the stock.
| GROWTH MODERATING | |||
| In Rs crore | FY10 | FY11E | FY12E |
| NI Income* | 5,681 | 7,941 | 9,231 |
| % chg y-o-y | 20.4 | 39.8 | 16.2 |
| Total Income | 8,539 | 10,360 | 11,885 |
| % chg y-o-y | 21.5 | 21.3 | 14.7 |
| NIM (%) | 2.3 | 2.7 | 2.5 |
| Chg in bps | -8.0 | 24.0 | 11.0 |
| Net profit | 3,022 | 4,111 | 4,439 |
| % chg y-o-y | 45.8 | 36.0 | 8.0 |
| E: Estimates, *Net Interest Income Source: Macquarie Research | |||
QIP: Fuel for growth
Canara Bank’s QIP is the second such offering from the public sector banking stable and comes three years after the first issue by Bank of India (worth $340 million). The QIP, which was done at Rs 604 a share (2.7 per cent discount to its pre-QIP market price of Rs 621), has broadened the shareholding of Canara Bank — The government’s stake has come down from 73.2 per cent to 67.7 per cent, which rubs off positively on its stock in the long run.
From business perspective, the move is positive also as it has shored up the bank’s capital base (Tier-I) and will also support its branch expansion plans. “Raising of capital is a positive for Canara Bank, as it improves visibility for growth. However, sustaining current profit growth will be a key challenge for the bank,” says Vaibhav Agarwal, banking analyst at Angel Broking.
Casa, NIMs key monitorables
Canara Bank’s NIMs have been rising steadily in the last seven quarters, a trend which may see a change. Owing to rising interest rates, the bank’s NIM is expected to come under pressure in 2011-12. This, however, could be moderated by keeping a tab on operating expenses.
“Poor Casa ratio of 29 per cent remains the biggest concern for the bank. Accordingly, we believe NIM compression for Canara may be higher than its peer banks, moderating its earnings,” wrote Macquarie analysts in a report released last month. The CASA ratio reflects the share of low-cost current and saving accounts to total deposits. Broadly, analysts expect its NIMs to be around 3 per cent for 2011-12, as against 3.2 per cent estimated for 2010-11.
Loan growth, asset quality healthy
Meanwhile, Canara Bank’s topline growth has been more than healthy. In the December quarter, its loan growth of 29 per cent was higher than its peers’. Even in the past, barring a couple of blips, the bank’s loan growth has been at over 20 per cent. Going forward, analysts believe that Canara’s loan growth will also moderate (in line with the industry) but remain better than the sector’s average.
However, the management sounds confident and believes it will be able to sustain margins and also deliver healthy topline growth, aided by branch expansion. Additionally, the bank is close to obtaining banking licences in Qatar, Johannesburg and Frankfurt. This will increase its overseas business contribution to the total revenue from 3.5 per cent at present to 5 per cent in the medium term.
On the asset quality front, too, Canara Bank has done better, leading to a steady decline in its net non-performing loans (see chart). Most analysts believe the bank’s asset quality should remain stable as delinquencies are expected to fall further.
The road ahead
Though the bank’s management intends to scale up its Casa ratio to 33-34 per cent by 2011-12, it may not be easy, given customers’ rising preference for high-yielding deposits.
Provisions towards employee pension liabilities to the tune of Rs 2,200-2,300 crore over five years (about Rs 100 crore a quarter) could also shave off some of the bank’s profit growth. These could cap profit growth in the next fiscal, especially the first half, estimate analysts.
Its relatively small size and margin concerns (led by lower Casa) have ensured that the bank’s stock, which had outperformed the Sensex and Banking index in the first half of 2010-11, has lagged these indices since November 2010.
At Rs 629, it trades at 1.4 times its estimated 2010-11 book value. While Agarwal of Angel Broking has a neutral view on the stock, most other analysts are bullish and believe that the recent correction has made valuations attractive. Thus, investors with a one-year perspective could consider the stock.
