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Canara Bank

Annual Report Analysis

July 2015

Annual Report AnalysisCanara Bank

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ABHINESH VIJAYRAJ [email protected] +91 44 4344 0006

NAVIN BABU E S [email protected] +91 44 4344 0065

NISHANT RUNGTA [email protected] +91 44 4344 0033

Financial Summary

Year NII (Rs.mn) PAT (Rs.mn) ROE (%) ROA (%) Adjusted Book Value (Rs.) P/ABV

FY15 96,637 27,026 10.7 0.5 373 0.9

FY16E 107,360 30,391 11.0 0.5 384 0.9

FY17E 124,299 39,895 13.1 0.6 418 0.8

FY18E 141,871 48,120 14.1 0.7 486 0.7

Stock Performance (%)

1m 3m 12m

CBK -11 -25 -36

Sensex 5 -1 9

Bankex 6 1 22

Date July 6, 2015

Market Data

SENSEX 28093

Nifty 8485

Bloomberg CBK IN

Shares o/s 515mn

Market Cap Rs. 148bn

52-wk High-Low Rs. 479-275

3m Avg. Daily Vol Rs. 783mn

Latest Shareholding (%)

Promoters 69.9

Institutions 23.8

Public 6.3

Canara Bank’s (CBK IN) FY15 annual report highlighted key focus areas viz. increasing the proportion of CASA

deposits, retail and agri loans. The Bank’s asset portfolio in FY15 was largely concentrated over large corporates and

Infrastructure segments. The loan book remains largely secured (83%), largely term loan oriented (57% of loans) with a

strong infra bias (19% of loans) and sizeable exposure to Metals sector (7% of loans). We note positives in terms of likely

NIM expansion, lower amount of write offs, improving delinquencies in the retail & service sectors and an extremely

granular FY15 restructured book.

Asset Quality: Asset quality continued to worsen during the year on the back of continued stress in the economy. In

order to contain slippages and increase recoveries, the bank conducted Canadalats at branch level and mega adalats at

Circle level for one time settlements, lok adalats at district level and regular follow-up of overdues in loan accounts. On

restructuring, we note that the incremental ticket size of restructuring in FY15 at Rs.2mn was the most granular ever.

Worryingly, the pain was widespread in terms of number of accounts getting restructured (~30,000 accounts on a total

fresh restructuring of Rs.70bn). Slippages from the restructured book accounted for 18% of FY15 slippages. Stressed

assets at 128% of the bank’s net worth ranks amongst the highest in the industry.

ALM Profile: With 20% liability-asset mismatch in its 1 year book, CBK is likely to see a moderate benefit in its NIM in

an easing rate environment. The yield curve normalizing (short term rates falling lower than long term rates) may

benefit CBK favourably, as 90% of liabilities are in the short term (<3 years); we also note a favourable mix on the

lending side led by its low working capital bias (43% of its total loans) with only 56% of the assets being in <3 year

bucket.

Capital: CBK has a Standardized approach for measurement of credit risk, Standardized Duration approach for Market

Risk and Basic Indicator approach for Operational Risk in line with Basel III. CBK’s Liquidity Coverage Ratio (LCR) at

65% just about meets the RBI’s mandated requirement of 60% and is the lowest amongst peers. RoRWA (Return on

Risk-weighted Assets), remained stable at 0.79% in FY15; the RWA/assets proportion of the bank was flat at 62%. With

CET1 of 7.5%, the bank scores very low on capitalization.

Other income: Other Income grew by 16% in FY15 contributed by gains on sale of investments. Off-balance sheet

items increased by 23% in FY15 which also resulted in a marginal increase in forex income in FY15. Bancassurance

streams continued to remain at steady albeit at low levels.


Source: Canara Bank Annual Report; Spark Capital Research

Sector

(Amounts in Rs. Bn)FY14 FY15 YoY growth (%)

Incremental growth

FY15 (%)Constituent (%)

Fund

based

Non fund

based

Fund

based

Non fund

based

Fund

based

Non fund

based

Fund

based

Non fund

based

Fund

based

Non fund

based

Coal & Mining 31 2 31 7 0% 334% 0% 3% 2% 1%

Iron & Steel & Other

Metals188 39 203 61 8% 54% 7% 12% 11% 14%

Engineering 72 53 80 158 12% 199% 4% 58% 4% 35%

Textiles 134 14 157 10 17% -29% 11% -2% 9% 2%

Food Processing 69 5 93 4 35% -5% 11% 0% 5% 1%

Chemicals, Dyes,

Paints etc.42 8 58 7 37% -10% 7% 0% 3% 2%

Cement 18 1 23 1 27% 74% 2% 0% 1% 0%

Gems & Jewellery 11 11 12 11 5% 2% 0% 0% 1% 2%

Construction 49 44 58 64 19% 45% 4% 11% 3% 14%

Infrastructure 645 39 850 68 32% 75% 94% 16% 47% 15%

of which Power 438 32 532 41 21% 29% 43% 5% 29% 9%

Petroleum, & Nuclear

Fuels 48 28 34 23 -30% -18% -7% -3% 2% 5%

Vehicles, Vehicle &

Transport Equipments32 7 41 16 27% 130% 4% 5% 2% 4%

Other Industries 259 17 176 18 -32% 5% -38% 0% 10% 4%

Total Exposure 1,598 266 1,815 447 14% 68% 100% 100% 100% 100%

The bank continued to lend

to infrastructure sector with

almost its entire incremental

fund based growth coming

from this segment,

specifically power.

Textiles and Food

Processing contributed

>10% to the incremental

funded growth in FY15.

Sectoral Exposures – Lopsided exposures to Infra and Metals

CBK continues to remain

exposed heavily to Infra and

Metals sector with more than

58% of its portfolio

accounting for these

sectors. Power exposure

continues to remain high at

29% of the overall book.

Notable movements in the

FY15 portfolio were sharp

decline in lending to the Coal

& Petroleum industry. The

bank increased its exposure

to Chemicals, Cement,

Construction and Food

Processing industries.


Asset Quality continues to deteriorate

High proportion (46%) of doubtful assets could constrain recoveries


Stressed assets at 10.3%, forms a whopping 128% of the bank’s net worth


Write-offs as a proportion of reductions, declined sharply from 43% in FY13 to 27%

in FY15


Incremental NPA formation from Agri & Industry; overall asset quality continues to

deteriorate


2.2%

2.0%

6.9%

1.9%

2.6%

2.0%

3.4%

4.5%

0.9%

2.5%2.4%

5.8%

2.6%

0.5%

3.9%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Agriculture &allied

Industry(MSME+Large)

Services Retail Overall GNPA

FY13 FY14 FY15

42,787 34,363

70,760 7,829 24,304

32,376

5,752 16,929

27,264

-

20,000

40,000

60,000

80,000

1,00,000

1,20,000

1,40,000

FY13 FY14 FY15

Break-up of NPAs

Sub Standard (Rs.mn) Doubtful (Rs.mn) Doubtful – 2 (Rs.mn)

Doubtful – 3 (Rs.mn) Loss (Rs.mn)

74,966

1,08,695 20,311

18,965

14,722 1,29,669

-

20,000

40,000

60,000

80,000

1,00,000

1,20,000

1,40,000

1,60,000

1,80,000

2,00,000

Openingbalance(Rs.mn)

Additions(Rs.mn)

Upgradations(Rs.mn)

Recoveries(Rs.mn)

Write-offs(Rs.mn)

Closingbalance(Rs.mn)

3.9%

8.1%

0.2%

1.3% 0.6%0.0%

10.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

GNPA (%) RestructuredAssets (%)

SecurityReceipts o/s

(%)

NPAProvisions

(%)

Std. assetprovisions

(%)

FloatingProvisions

(%)

Stressedassets (%)


Restructured Book

FY15 restructuring was led by growth in bilateral restructuring, while CDR assets

increased marginally…


Average ticket size of fresh restructured accounts is the most granular in FY15

(Rs.2mn), in contrast to peers


… >80% of slippages from the restructured portfolio in FY15 was CDR linked


Restructured assets was relatively flat at 6.9% of advances between FY14 & FY15


230

70

11 1220

12

266

0

50

100

150

200

250

300

350

Opening Balance FreshRestructuring

Upgradation Moving out postmoratorium

Downgradation Writeoff Closing Balance

Rs. B

n

Movement of Standard Restructured Assets

20 35 4525

538

144

179

0

50

100

150

200

250

FY13 FY14 FY15

Rs.b

n

Restructured Standard book

CDR SME Bilateral

2

6

16

0

1

1

2

5

2

0

5

10

15

20

25

FY13 FY14 FY15

Rs.b

n

Slippages from Restructured Book

CDR SME Bilateral

35

13

2

0

5

10

15

20

25

30

35

40

FY13 FY14 FY15

Fresh Restructuring

Avg. ticket size (Rs.mn)


Stable Asset – Liability Profile

Concentration of advances and deposits continued to normalize in FY15 while concentration of NPAs declined in FY15 indicating widening of pain in the overall portfolio


In the <1 year bucket, higher proportion of liabilities (55%) compared to assets (35%) maturing in FY16 augurs well for margins


49%62% 55%

16%

30%35%14%

3% 5%21%5% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY13 FY14 FY15

Liabilities <= 1year 1 - 3 years 3 - 5 years > 5 years

35% 33% 35%

20% 21% 21%

12% 14% 14%

33% 33% 30%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY13 FY14 FY15

Assets <= 1year 1 - 3 years 3 - 5 years > 5 years

-12%-28% -24%

3%

-10% -9%

-4%

9% 14%14%

29% 20%

-50%

0%

50%

FY13 FY14 FY15

ALM mismatch (Liabilities - Assets)

<= 1year 1 - 3 years

3 - 5 years Mismatch in > 5 years bucket

349 289

322

14.4%

9.6% 9.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

-

50

100

150

200

250

300

350

400

FY13 FY14 FY15

Advances of top 20 borrowers (Rs.bn)

% of total advances (RHS)

585

624

611

16.4%

14.8%

12.9%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

560

570

580

590

600

610

620

630

FY13 FY14 FY15

Deposits of top 20 depositors (Rs.bn)

% of total deposits (RHS)

12 12

19

19.0%

15.4%14.5%

0.0%

5.0%

10.0%

15.0%

20.0%

-

5

10

15

20

FY13 FY14 FY15

NPA - Top 4 accounts (Rs.bn)

% of total NPAs (RHS)


Weakening Capital Profile

Despite the >100% RWA increasing from 12% to 15% in FY15…


The bank scores low on capitalization with CET1 at 7.5%


… RoRWA has improved marginally from 0.78% in FY14 to 0.79% in FY15; while the

RWA/Assets has remained constant at 62%


Liquidity Coverage Ratio (LCR) at 65%, against the mandated 60%


1,232

191

1,041

676

65%

0%

10%

20%

30%

40%

50%

60%

70%

0

200

400

600

800

1000

1200

1400

Cash Outflows(Rs.bn)

Cash Inflows(Rs.bn)

Net Deficit(Rs.bn)

High QualityLiquid Assets

(Rs.bn)

LiquidityCoverage Ratio

(%, RHS)

71% 65% 63%

20%24% 22%

9% 12% 15%

0%

20%

40%

60%

80%

100%

FY13 FY14 FY15< 100% Risk weighted assets = 100% Risk weighted assets

> 100% Risk weighted assets

87% 88%

7% 7%

6% 5%

100% 100%

0.78%

0.79%

0.78%

0.78%

0.78%

0.78%

0.78%

0.79%

0.79%

80%

84%

88%

92%

96%

100%

104%

FY14 FY15

Credit RWA (%) Market RWA (%)

Operational RWA (%) Return on RWA (RHS, %)

9.8%7.4% 7.5%

2.6%

3.0% 2.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

FY13 FY14 FY15

Common Equity tier-I capital Additional tier-I capital

Tier-II capital Regulatory Requirement (Tier I)


Advances book remains largely secured, with bias towards term loan lending; Priority Sector Lending (PSL) at 40.89% of ANBC vs the mandated 40%


Secured, term loan focussed loan book profile; PSL compliant

Contingent liabilities increased 23% in FY15, led by a 30% increase in forex

contracts. Claims against the bank rose 9% during the year


Off balance sheet items grew 23% in FY15, led by a 30%

increase in forex contracts. The bank witnessed a 9%

increase in claims against it.

The off balance sheet to on balance sheet ratio for FY15 was

50% against 45% in FY14

The bank sold 66 accounts to ARCs for a consideration of

~Rs.9bn at an aggregate value of ~Rs.5bn. The bank had

Rs.5bn o/s in security receipts as on March 31, 2015.

FY2014FY2014 FY2014

Secured Advances,

83%

Unsecured Advances,

17%

84%

16%

Working Capital,

43%Term Loan,

57%

42%

58% 34%66%

Priority Sector,

35%

Others, 65%

Claims, 3%

Fex contracts,

75%

Derivative contracts,

0%

Guarantees, 14%

Others, 7%


Other income to assets remains steady in FY15


Other Income & Opex

The bank continues to add to its headcount with

employees/branch normalizing at 9.5


Healthy growth in FY15 Other Income was led by

growth in profit on sale of investments


The average salary per employee increased marginally

during the year


AFS/HFT declined to 29% in FY15 as against 33% in

FY14


Discount rates declined from 9.3% to 8.0% in FY15


25% 24% 20%

21% 17% 25%

15% 17% 17%

37% 40% 35%

8%

25%

16%

0%

20%

0%

50%

100%

FY13 FY14 FY15

Composition of Other Income

Misc. income Forex gain

Profit on sales of inv Comm, Ex. brokerage

Growth in Other Income (RHS)

61%45% 50%

0.8%

0.9% 0.9%

0.76%

0.78%

0.80%

0.82%

0.84%

0.86%

0.88%

0.90%

0%

10%

20%

30%

40%

50%

60%

70%

FY13 FY14 FY15

Off BS / On BS assets (%)

Other income to assets (%, RHS)

42,693 48,794

53,984

11.510.3

9.5

0

2

4

6

8

10

12

14

0

10,000

20,000

30,000

40,000

50,000

60,000

FY13 FY14 FY15

Employees (Nos.)

Employees / Per Branch (RHS)

13.8

12.8 12.8

0.76

0.75

0.79

0.73

0.74

0.75

0.76

0.77

0.78

0.79

0.80

12.2

12.4

12.6

12.8

13.0

13.2

13.4

13.6

13.8

14.0

FY13 FY14 FY15

Opex per Branch (Rs. Mn)

Avg. Salary per Emp. (Rs. Mn) (RHS)

8.3

%

9.3

%

8.0

%

8.0

%

9.2

%

9.2

%

8.0%

9.0%

7.7%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

FY13 FY14 FY15

Discount rate (%)

Expected rate of return on plan assets (%)

10 Yr Gsec. Yields (%) (RHS)

60% 67% 71%

1%0% 1%

39% 33% 28%

109%

-2% 73%

-100%

0%

100%

200%

0%

50%

100%

FY13 FY14 FY15

Break-up of Investment Book

Available for SaleHeld for TradingHeld to MaturityYoY increase in Treasury Income (RHS)


Financial Summary

Abridged Financial Statements Key Metrics

Rs.mn FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E

Profit & Loss Growth ratios

Net Interest Income 96,637 107,360 124,299 141,871 ABV per share -5.3% 3.0% 8.8% 16.4%

Other Income 45,503 47,195 52,209 59,259 Advances 9.6% 9.7% 12.0% 14.0%

Fee Income 9,286 18,415 22,581 26,512 Deposits 12.6% 9.1% 12.0% 14.0%

Treasury Income 11,484 8,480 10,828 11,947 NII 8.0% 11.1% 15.8% 14.1%

Total Income 142,139 154,556 176,508 201,130 PAT 10.8% 12.5% 31.3% 20.6%

Operating Expenses 72,636 77,252 85,150 96,680 EPS 7.6% 12.5% 31.3% 20.6%

Pre-Provision Profit 69,504 77,304 91,358 104,450 Asset Quality

Provisions 34,527 36,782 38,864 41,134 Gross NPA (Rs.mn) 130,400 152,507 175,383 196,429

PBT 34,976 40,522 52,494 63,316 Gross NPA 4.0% 4.2% 4.3% 4.3%

PAT 27,026 30,391 39,895 48,120 Net NPA 2.6% 2.9% 3.0% 2.8%

Balance Sheet Slippage 3.6% 3.2% 3.2% 2.9%

Networth 264,534 287,330 319,998 360,335 Coverage 33.0% 31.2% 30.7% 34.1%

Deposits 4,738,401 5,170,157 5,790,576 6,601,257 Growth in Gross NPA 71.3% 18.8% 15.0% 12.0%

CASA 1,135,320 1,226,310 1,372,367 1,630,510 Asset-Liability Profile

Borrowings & Current Liabilities 423,012 476,843 542,474 697,661 Leverage (x) 19.4 19.3 19.4 19.6

Total Liabilities & Networth 5,480,006 5,989,313 6,708,030 7,714,235 CD ratio 69.7% 70.0% 70.0% 70.0%

Cash with RBI & other banks 486,411 614,112 579,330 663,123 CASA 24.0% 23.7% 23.7% 24.7%

Advances 3,300,355 3,619,110 4,053,403 4,620,880 Tier I CAR 8.1% 7.9% 7.7% 7.4%

Investments 1,453,462 1,537,312 1,833,809 2,162,267 Profitability and Efficiency

Fixed & Current Assets 239,778 218,779 241,488 267,966 Net Interest Margin 2.0% 2.1% 2.1% 2.1%

Total Assets 5,480,006 5,989,313 6,708,030 7,714,235 ROA 0.5% 0.5% 0.6% 0.7%

Other Information ROE 10.7% 11.0% 13.1% 14.1%

Shares outstanding (mn) 475 475 475 475 Valuation

Current market price (Rs.) 335 335 335 335 Book Value per share (Rs.) 557 605 673 758

Market capitalisation (Rs. mn) 154,614 154,614 154,614 154,614 Adj Book Value per share (Rs.) 373 384 418 486

Earnings per share (Rs.) 56.9 64.0 84.0 101.3 P/ABV (x) 0.9 0.9 0.8 0.7

Dividend per share (Rs.) 10.5 12.0 13.0 14.0 P/E (x) 5.9 5.2 4.0 3.3


Disclaimer

0

100

200

300

400

500

600

01-May-12 01-Nov-12 01-May-13 01-Nov-13 01-May-14 01-Nov-14 01-May-15

Historical Target

Canara Bank

Report Date CMP (Rs.) TP (Rs.) Recommendation

26/May/15 335 292 Sell

10/Feb/15 401 342 Sell

10/Nov/14 404 342 Sell

23/Jul/14 402 316 Sell

06/May/14 304 232 Sell

03/Feb/14 221 196 Sell

13/Nov/13 250 209 Sell

05/Aug/13 242 209 Sell

03/May/13 394 314 Sell

12/Feb/13 435 314 Sell

08/Nov/12 435 314 Sell

01/Oct/12 431 310 Sell

Report Date CMP (Rs.) TP (Rs.) Recommendation

21/Sep/12 430 310 Sell

07/Sep/12 323 310 Sell

30/Jul/12 348 310 Sell

29/Jun/12 413 344 Sell

17/May/12 400 344 Sell

02/Mar/12 513 456 Sell


Disclaimer

Spark Disclaimer

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have not been debarred from doing business by any Stock Exchange/SEBI or any other authorities, nor has our certificate of registration been cancelled by SEBI at any point of

time.

Spark Capital has a subsidiary Spark Investment Advisors (India) Private Limited which is engaged in the services of providing investment advisory services and is registered

with SEBI as Investment Advisor. Spark Capital has also an associate company Spark Infra Advisors (India) Private Limited which is engaged in providing infrastructure

advisory services.

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Absolute

Rating

Interpretation

BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCEStock expected to provide returns of <5% – -10% over a 1-year

horizon

ADDStock expected to provide positive returns of >5% – <15% over a 1-year

horizonSELL Stock expected to fall >10% over a 1-year horizon


Disclaimer (Cont’d)

Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,

Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:

Disclosure of interest statement CBK

Analyst financial interest in the company No

Group/directors ownership of the subject company covered No

Investment banking relationship with the company covered No

Spark Capital’s ownership/any other financial interest in the company covered No

Associates of Spark Capital’s ownership more than 1% in the company covered No

Any other material conflict of interest at the time of publishing the research report No

Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months:

Managing/co-managing public offering of securities

Investment banking/merchant banking/brokerage services

Products or services other than those above

In connection with research report

No

Whether Research Analyst has served as an officer, director or employee of the subject company covered No

Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; No

Analyst Certification of Independence

The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research

analyst’s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.

Additional Disclaimer for US Institutional Investors

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