[T.S.R:16116] Canara Bk-For Outperformance Put Some Money Into Bkg Stocks

Raising target price and estimates. We upgrade Canara Bank to Buy from Hold, and raise FY11e/FY12e EPS by 45.8%/44.1%, due to its healthy 2QFY11 performance. We value the stock at 1.9x FY12e ABV (earlier 1.3x) owing to a better RoE, and raise our target price to `863 from `537. n       Net profit up 10.7%. Robust net interest income growth (52.5% yoy) and lower provisions (down 48.8% yoy) aided net profit growth. Trading gains were `15.8m, plunging 96.4% yoy. n       Business growth steady, NIM expands. Credit and deposits growth yoy (20.2% and 21.5% respectively) was complemented by 50bp yoy NIM expansion to 3.16%. As loan growth revives, credit-to-deposits is likely to improve, further enhancing NIMs. We raise our FY11e and FY12e NII by 20.3% and 33% respectively and estimate FY10-13 NIM at ~3%. n       Improving coverage, declining credit costs. Gross NPAs rose 3% qoq, with NPA coverage (including technical write-offs) at 77.1%. Credit costs declined 18%yoy to `2bn (0.5% of loans) and are unlikely to be a huge risk to earnings growth ahead. We estimate credit costs at 45bp in FY11 and 44bp in FY12. n       RoE to improve, hence re-rating likely. We expect earnings CAGR of 27.1% and RoE of ~25% over FY10-13e. As the bank's NIM and asset quality improves to its peer average, we expect it to trade at a higher PBV than in the past. n       Valuation and risks. At our target price, Canara would trade at FY12e PBV of 1.6x and FY13e BV of 1.3x. Risk: Higher credit costs, due to lower-than-expected NPA recoveries. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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