LKP Research's research report on Canara Bank
Canara Bank has been reporting consistent growth in net profit since last eight quarters. A bulky provision (₹54bn) made in 4QFY20 (two years ago), continued to safeguard the balance sheet with PCR (calculated) of 67% and PCR (including TWO) of 84%. The bank’s margin (2.9% in the 4QFY22) is in upward trajectory with continuous improvement in CD ratio. On the business front, the bank has been reporting stable credit growth (2% sequential jump seen in 4QFY22) across segments. The bank’s recoveries are in line with the guidance and we expect the credit cost to be below 2% for FY23. Moreover, the bank has raised capital in FY21 which resulted in the CET -1 of 10.3% (at par); thus we believe the bank may raise capital from stake sales of AMC, HFC and insurance company. We believe the hurdles from merger (with Syndicate Bank) are behind and the bank shall witness gradual improvement in profitability with FY23E ROA/ROE of 1%/16%. Given inexpensive valuation (0.55x PBVPS), we recommend BUY.
Outlook
Factoring near term capital infusion, we expect the bank’s loan book to fatten cautiously at CAGR of 9.2% over FY21-23E, led by corporate book growth. In our opinion, the bank’s credit cost will normalise further by FY23E and estimate return ratio ROA/ROE of 1% and 16% in FY23E. We value the standalone entity at 0.6xFY23E BVPS (₹433) and arrive at a target price of ₹260. We recommend BUY with a potential upside of 30%.
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