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Asset quality overhang remains a worry for Canara Bank

Asset quality overhang remains a worry for Canara Bank

Radhika Merwin BL Research BureauShare






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May 4, 2013:

The RBI’s decision to refrain from a cut in cash reserve ratio (CRR) may signal disappointment for banking stocks. A cut, if it had materialised, may have lowered the cost of funds for banks which are facing margin pressures, from declining lending rates and still-high deposit rates. Challenges such as this may be particularly acute for banks such as Canara Bank, which have been growing at a slower rate than the industry. The time may be ripe to book profits on the stock.

Canara Bank has been witnessing loan growth that is below industry levels in recent times. In 2012-13, loan growth for the bank stood at four per cent far below the industry growth of 14 per cent.

While loan growth remains a concern, the bank has also seen relatively low deposit growth of 8.8 per cent during 2012-13. This has been partly on account of its conscious strategy to shed high cost deposits. From a contribution of 34 per cent in 2011-2012, the high cost deposits now constitute 15 per cent of the total deposits. While this should have aided margins on account of lower cost of funds, net interest margins (NIMs) declined in 2012-2013 by 11 basis points to 2.39 per cent.

This is due to sluggish growth in the low-cost current account savings account (CASA) deposits at eight per cent. Thus, the CASA ratio as per cent of deposits remains low at 25 per cent. The cost of funds continued to increase during 2012-13, offsetting the marginal increase in yields.

While the entire banking sector continues to face liquidity crunch, with a credit deposit ratio at 77 per cent, Canara Bank has a lower ratio of 68 per cent. This indicates the bank’s inability to significantly grow its loan book. It also maintains higher statutory liquidity ratio (SLR) investments. As of March 2013, the SLR as a per cent of deposits stood at 28.6 per cent, higher than the stipulated RBI’s level of 23 per cent. Asset quality overhang remains a main concern for the bank as well. Canara Bank’s gross non-performing assets deteriorated from 1.7 per cent to 2.6 per cent of loans in 2012-13. The restructured assets remain high at 7.5 per cent of the loans as of March 2013. The tier-I capital adequacy at 9.7 per, shows that Canara Bank will require further capital infusion in 2013-14, to meet Basel-III norms.

The stock trades at 0.7 times its one-year forward book value, which is lower than its historical average of 1.1 times. However, on a price to adjusted book basis (book value adjusted for net non performing assets) the stock trades at 0.9 times. Modest growth outlook and further delinquencies on loans make it a less preferred stock in the public sector space.

Keywords: Canara Bank, Public Sector bank, book profit

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