Two years ago, late investor Rakesh Jhunjhunwala increased his stake in Canara Bank after he said PSB shares were “horribly undervalued”, and his wife, Rekha Jhunjhunwala, maintained. betting ever since. In fact, it has increased its holdings in public sector banking this year, and its holdings in the bank were 2.07% at the end of June.
Jhunjhunwala’s beliefs are shared by many, and investors have grown fond of public sector banking stocks in general over the past year. This explains the outperforming performance of the Nifty PSU Banking Index over the Nifty 50 Index. The Banks Index has surged 64% over the past year compared to the Nifty’s 19%. Even in the past month, public sector bank stocks have become a bargain hunter for investors.
Canara Bank’s share price is up 50% in the past year, but it can’t outperform its peers. It is still trading below its one-year forward book value and analysts are not expecting any changes or new ratings here. Canara Bank does not receive the same treatment as its largest lender, State Bank of India (SBI) or Baroda Bank, which trade slightly above or equal to one-year forward book value. years and is the best public sector banking pick from several brokers.
Analysts at Kotak Institutional Equities and JM Financial estimate the stock’s fair value at 0.8 times its estimated one-year book value, while analysts at Emkay Global Financial Services Ltd set a value. reasonable is 0.9 times. But the head of Canara Bank is making all the right noises about risk and growth that will be music to investors. The review rating has also increased. Bankers have warned that instances of poor risk assessment have been found in corporate loans amid a surge in private investment and a rush into large corporate loans.
The CEO cum CEO of Bank Canara K Satyanarayana Raju wants to be measured and careful in lending. “We don’t want to compete with other banks to increase revenue,” he told Moneycontrol in an interview. “We will not lend at ridiculous prices.”
This differs from the typical pattern of wholesale bankers, who point out that growth is a top priority. The consequence of this approach is a punishing cycle of bad debts. Raju expressed caution not only towards business lending but also towards the unsecured personal lending space, leaving banks scrambling for market share. “We only allow personal loans to existing customers and only those who have a payroll account with us. We don’t want to be too aggressive here,” Raju told reporters in his exchange after the July 24 quarterly results.
Analysts believe that the bank has enough growth leverage and adequate provision for risks. JM Financial expects credit costs to be contained to 120 basis points (bps) during FY24-FY25. The lender reported a credit cost of 110 basis points for Q1FY24. A basis point is a hundredth of a percentage point.
Success and failure in the first trimester
Canara Bank’s strength was its asset quality in the first quarter, which helped the bank report its highest quarterly net profit ever recorded. Debts that are past due have steadily declined and are down 16.4% year-on-year in April-June 2024. Additionally, loans come under early pressure, known as Special Mention Accounts. (SMA), also fell, indicating the bank has improved its risk assessment. At the end of June, bad loans accounted for 5.15% of a lender’s loan portfolio, compared with 6.98% a year ago. The bottom line is that return on equity and return on assets have improved and analysts believe more improvement will be expected in the coming quarters. “The healthy trend in bad debt recovery is likely to continue for some time as the bank has a large amount of bad assets. Along with this, high financial leverage will ensure that the bank offers a medium to high ROE to youth over the medium term,” Kotak Institutional Equities analysts wrote in their note.
However, the bank has performed poorly on deposits and loan growth has been slower than banks that have reported results to date. Its advances were up 13% year-on-year, and deposits rose and fell to just 6%. Raju said lenders have a number of measures to promote deposit growth, especially low-cost checking and savings accounts (CASA). The bank aims to increase the share of CASA in total deposits to 35% by the end of 2024, from the current 33%. “For the rest of the year, we will be launching products (CASA) specifically for women as well as products for retirees,” he told Moneycontrol.
Even so, Canara Bank’s CASA ratio is not at par with peers like Punjab National Bank (42% in first quarter), Baroda Bank and even Bank of India. This puts more pressure on the profit margin of the coming quarters compared to the remaining quarters. With 80% of business loans re-evaluated complete, lenders have little opportunity to increase profits. That said, 52% of its loan portfolio is priced away from the MCLR (marginal cost-based lending rate), providing an opportunity to increase lending rates. The trajectory of its margins over the coming quarters will be one of the main reasons analysts are reconsidering its valuation. In addition, investors will wait for evidence of the bank’s claim of better underwriting through asset quality measures. For fiscal year 2024, however, Canara Bank has all the ingredients it needs to grow again.
