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JMFL
Canara Bank (Hold)
CMP: ₹348.45
Target: ₹490
Canara Bank’s slippage rate trended lower in 3QFY18 (3.3 per cent annualised) to ₹2,600 crore. Credit costs however, remained high (214 bps annualised) as Canara Bank shored up PCR (provision coverage ratio) c. 150 bps sequentially. Stock of stressed loans for Canara Bank (ex-overlaps) now stands at c.11 per cent of loans, and management remains optimistic of recoveries from the lumpier NCLT accounts (which constitute c. 40 per cent of NPLs).
Canara Bank will receive ₹4,870 crore of capital as part of the recap exercise from the Centre and also plans to raise ₹3,500 crore via QIP, both before the end of FY18E. This could help it shore up its Tier 1 capital by c. 240 bps. Moreover, Canara Bank plans to sell 25-30 per cent in CanfinHomes to further boost capital adequacy.
We roll forward to FY20E, and factor in the recap infusion of ₹4,870 crore in FY18E. We expect RoA to expand to c.60 bps by FY20E, primarily on account of lower net slippages and the consequent lower credit costs (to reduce 130 bps to 1.2 per cent over FY18-20E) .
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