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Canara Bank
Annual Report Analysis
July 2015
Annual Report AnalysisCanara Bank
Page 2Find Spark Research on Bloomberg (SPAK <go>),
Thomson First Call, Reuters Knowledge and Factset
ABHINESH VIJAYRAJ abhinesh@sparkcapital.in +91 44 4344 0006
NAVIN BABU E S navin@Sparkcapital.in +91 44 4344 0065
NISHANT RUNGTA nishant@sparkcapital.in +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.
Annual Report AnalysisCanara Bank
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%
Page 3
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.
Annual Report AnalysisCanara Bank
Page 4
Asset Quality continues to deteriorate
High proportion (46%) of doubtful assets could constrain recoveries
Source: Canara Bank Annual Report; Spark Capital Research
Stressed assets at 10.3%, forms a whopping 128% of the bank’s net worth
Source: Canara Bank Annual Report; Spark Capital Research
Write-offs as a proportion of reductions, declined sharply from 43% in FY13 to 27%
in FY15
Source: Canara Bank Annual Report; Spark Capital Research
Incremental NPA formation from Agri & Industry; overall asset quality continues to
deteriorate
Source: Canara Bank Annual Report; Spark Capital Research
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 (%)
Annual Report AnalysisCanara Bank
Page 5
Restructured Book
FY15 restructuring was led by growth in bilateral restructuring, while CDR assets
increased marginally…
Source: Canara Bank Annual Report; Spark Capital Research
Average ticket size of fresh restructured accounts is the most granular in FY15
(Rs.2mn), in contrast to peers
Source: Canara Bank Annual Report; Spark Capital Research
… >80% of slippages from the restructured portfolio in FY15 was CDR linked
Source: Canara Bank Annual Report; Spark Capital Research
Restructured assets was relatively flat at 6.9% of advances between FY14 & FY15
Source: Canara Bank Annual Report; Spark Capital Research
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)
Annual Report AnalysisCanara Bank
Page 6
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
Source: Canara Bank Annual Report; Spark Capital Research
In the <1 year bucket, higher proportion of liabilities (55%) compared to assets (35%) maturing in FY16 augurs well for margins
Source: Canara Bank Annual Report; Spark Capital Research
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)
Annual Report AnalysisCanara Bank
Page 7
Weakening Capital Profile
Despite the >100% RWA increasing from 12% to 15% in FY15…
Source: Canara Bank Annual Report; Spark Capital Research
The bank scores low on capitalization with CET1 at 7.5%
Source: Canara Bank Annual Report; Spark Capital Research
… RoRWA has improved marginally from 0.78% in FY14 to 0.79% in FY15; while the
RWA/Assets has remained constant at 62%
Source: Canara Bank Annual Report; Spark Capital Research
Liquidity Coverage Ratio (LCR) at 65%, against the mandated 60%
Source: Canara Bank Annual Report; Spark Capital Research
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)
Annual Report AnalysisCanara Bank
Advances book remains largely secured, with bias towards term loan lending; Priority Sector Lending (PSL) at 40.89% of ANBC vs the mandated 40%
Source: Canara Bank Annual Report; Spark Capital Research
Page 8
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
Source: Canara Bank Annual Report; Spark Capital Research
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%
Annual Report AnalysisCanara Bank
Other income to assets remains steady in FY15
Source: Canara Bank Annual Report; Spark Capital Research
Page 9
Other Income & Opex
The bank continues to add to its headcount with
employees/branch normalizing at 9.5
Source: Canara Bank Annual Report; Spark Capital Research
Healthy growth in FY15 Other Income was led by
growth in profit on sale of investments
Source: Canara Bank Annual Report; Spark Capital Research
The average salary per employee increased marginally
during the year
Source: Canara Bank Annual Report; Spark Capital Research
AFS/HFT declined to 29% in FY15 as against 33% in
FY14
Source: Canara Bank Annual Report; Spark Capital Research
Discount rates declined from 9.3% to 8.0% in FY15
Source: Canara Bank Annual Report; Spark Capital Research
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)
Annual Report AnalysisCanara Bank
Page 10
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
Annual Report AnalysisCanara Bank
Disclaimer
Page 11
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
Annual Report AnalysisCanara Bank
Disclaimer
Page 12
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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
Annual Report AnalysisCanara Bank
Disclaimer (Cont’d)
Page 13
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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
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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
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