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Suresh Krishnamurthy

FRESH investments can be considered in the stock of Canara Bank. The stock is attractively valued compared to peers such as Punjab National Bank and Bank of Baroda. The stock trades at a price-to-earnings multiple of less than four.

However, Canara Bank has reported higher earnings growth in the first quarter of 2003-04 compared to PNB and BOB.

Canara Bank is likely to maintain relatively higher growth for the next three quarters too, making the stock attractive compared to its peers.

In the case of BOB and PNB, the issue of return of capital may be behind the slightly superior valuation.

However, Canara Bank can also afford to return capital to the Government after November 2003. As such, any potential benefits linked to return of capital are applicable to Canara Bank also.

Suitability: Valuation of banking stocks is now at higher levels compared to the historical average. The valuation takes into account positive features such as the benign interest rate scenario and the possibility of an improvement in credit off-take.

If these factors change for the worse, then the stocks will be exposed to downside risk. Overall, since Canara Bank is relatively more attractively valued compared to its peers, the downside risk is perceived to be lower.

For the bank, there was a relatively larger deterioration in asset quality in 2002-03 relative to its peers. If this trend persists, then the stock would be exposed to larger downside compared to its peers.

However, as of now, the earnings story remains intact and asset quality deterioration does not appear significant enough to derail earnings growth.

Rapid growth: Canara Bank is one of the largest banks in India. In terms of size, it is almost as large as Punjab National Bank, which is the largest after State Bank of India.

Canara Bank reported earnings growth of about 50 per cent in 2002-03 and followed that with growth in earnings of about 80 per cent for the quarter ended March 2003.

A 45 per cent growth in `other income', which comprised of profits on treasury operations, was responsible for the higher earnings growth. However, revenue from banking operations had grown on the back of improvement in spreads.

Canara Bank also reported higher than industry average growth in advances and deposits in 2002-03. Generally, this augurs well.

However, in the light of the increase recorded in non-performing assets (NPAs), the higher growth rate in advances is a cause for concern and may need to be closely watched.

As of now, though, NPAs are not a major concern. In fact, net non-performing assets-to-net advances ratio fell to 3.86 per cent from 5.32 per cent because of higher provisions.

The declining trend in NPA ratios, higher-than-adequate capital adequacy and continued soft interest rate regime suggest that profit growth will continue, leading to share price appreciation.

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