Motilal Oswal has reiterated its ‘Buy’ rating on PSU bank Canara Bank stock, with as much as 25% expected upside from the current market price, citing the bank’s healthy performance, and the anticipated expansion of Return on Assets (RoA) and Return on Equity (RoE). Motilal Oswal has set a target price of INR 425 per share on Canara Bank stock; it is premised on valuing the stock at 0.9 times the Estimated Adjusted Book Value (ABV) for FY25.
Canara Bank Q1FY24 results beat street: NII strong, margins stable
Business growth remained steady, with the loan book expanding by approximately 15% YoY and 3% QoQ, driven by growth in the Corporate, Retail, and Agri segments. Deposits grew 7% YoY and 1% QoQ. Canara Bank’s asset quality showed significant improvement, and the management is optimistic about further reducing Net Non-Performing Assets (NPA) at an accelerated pace. Despite this positive trend, the Special Mentioned Accounts (SMA) book saw a 51% QoQ increase to INR 98.9 billion.
Canara Bank management commentary supports positive outlook
Canara Bank’s management commentary further supports the positive outlook, with expectations of Global Net Interest Margins (NIM) to be around 3.05% and credit cost at 1.2% for FY24. The bank aims to achieve a Gross NPA (GNPA) of 4.5% and Net NPA (NNPA) of 1.2% by the second quarter of FY24. Additionally, the bank enlists a consultant to address revised calculations, with an estimated Effect of Credit Loss (ECL) provision in the range of 2% to 2.25% of advances.
Canara Bank asset quality improves, but few challenges persist
While Canara Bank has shown steady performance, challenges persist with regards to slippages and the SMA book. However, the overall asset quality ratios have improved, with GNPA and NNPA declining by 20 basis points and 16 basis points QoQ, respectively, reaching 5.2% and 1.6%. The Provision Coverage Ratio (PCR) has also improved to 70.6%, reflecting the bank’s efforts to manage risk effectively.
With a focus on maintaining steady growth and improving asset quality, Canara Bank continues to be viewed positively by Motilal Oswal, and they expect the bank to deliver a RoA of 1.1% and RoE of 17.2% for FY25. Investors are advised to consider the bank’s encouraging performance and the potential for growth and profitability in the future, said Motilal Oswal note.