Canara Bank Update

Canara Bank
Recommendation: Buy
Price target: Rs315
Current market price: Rs274

Q3FY2008 results: First-cut analysis

Result highlights

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Canara Bank during Q3FY2008 reported a profit after tax (PAT) of Rs458.8 crore beating our estimate of Rs410.4 crore. The Q3FY2008 PAT indicates a growth of 26.4% year on year (yoy) and 14.2% quarter on quarter (qoq), primarily driven by a jump in non-interest income coupled with lower provisions.
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The reported net interest income (NII) for the quarter stood at Rs934.4, down 1.3% yoy from the NII of Rs961.9 crore (adjusted for tax refund and amortisation) for the year-ago period. Excluding the adjustments, the NII would have declined by 10% yoy.
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Meanwhile, the operating expenses grew by 13.5% yoy to Rs723 crore, mainly driven by a higher other operating expenses. Moreover, the other expenses are likely to remain high in the next quarter as well, owing to the re-branding exercise launched by the bank recently.
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The provisions at end of the quarter stood at Rs199 crore, down 24.3% yoy while up 11.3% qoq. The lower provisions yoy helped support a higher PAT growth.
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Asset quality remained robust during the quarter with gross non-performing assets (GNPA) witnessing a 18.6% year-on-year decline to Rs1,524.8 crore. Meanwhile, the net non-performing assets were largely flat at Rs873.2 crore.
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Capital adequacy ratio (CAR) remained healthy at 13.7% at the end of December 2007 compared with 12.7% at the end of December 2006 and 13.9% as at the end of September 2007.
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At the current market price of Rs274, the stock is quoting at 6.6x FY2009E earnings per share (EPS), 3.4x its 2009E pre-provisioning profit (PPP) and 0.9x FY2009E book value. We are revisiting our earnings model following the higher-than-expected numbers released by the bank.