Canara bank research report

Canara bank posted its highest Net profit of 10,604 crores for the first time in years in FY 2022-23. not canara bank but all of the PSU banking sector looks promising and recording level high profits. Public banks which became burden for government with huge debts soon became one of major revenue sources for them. In this article we would look upon the fundamental as well as technical research of Canara bank, with levels

Canara bank research report

Overview and history of the bank:

Canara bank LTD is the fourth largest PSU Bank in India with assets of over Rs. 13.81 Lakh Crore in FY 2023. The bank has presence in every remote corner of India and has history of over 100 years, started in 1906 and nationalised in 1969, It is one of the most prominent banks in India. It offers various financial services such Treasury Operations, Retail Banking Operations, Wholesale Banking Operations and Other Banking Operations. 

The bank was formed by Mr. Ammembal Subba Rao Pai, an philanthropist from mangalore. His motive of opening the bank was to give cheap credit to the poor people of south canara, due to excessive interest charged by the moneylenders of that area. At that time the bank was called “Canara Hindu Permanent Fund Ltd” and later changed to “Canara bank”

The bank has gone through various phases of growth trajectory and its first breakthrough came after the acquisition of Bank of Kerala, which then followed by many small acquisions of various small banks in states of Kerala, Andhra Pradesh and Tamil Nadu. The bank got nationalised status at year 1969 followed by 13 another banks.

In 1996, Canara Bank became the first Indian Bank to get ISO certification for "Total Branch Banking" for its Seshadripuram branch in Bangalore.

Canara Bank has several firsts to its credit. These include:

·      Launching of Inter-City ATM Network

·      Obtaining ISO Certification for a Branch

·      Articulation of Good Banking – Banks Citizen Charter

·      Commissioning of Exclusive Mahila Banking Branch

·      Launching of Exclusive Subsidiary for IT Consultancy

·      Issuing credit card for farmers

·      Providing Agricultural Consultancy Services

As at June 2023, Canara Bank services over 11.04 crore customers through a network of 9,653 branches and 12,114 ATMs spread across India.

Subsidiaries of the banks includes-

·      Canfin Homes Limited (CFHL), with a network of 110 branches and 28 satellite offices throughout India

·      Canbank Factors Limited

·      Canbank Venture Capital Fund Limited

·      Canbank Computer Services Limited

·      Canara Bank Securities Limited

·      Canara Robeco Asset Management Company Limited

·      Canbank Financial Services Limited

·      Canara HSBC Life Insurance Company Limited

Key management-

Ownership Pattern-

Major shareholders-

Banking Industry Research-

Canara bank belongs to public sector banking sector with heavyweight peers such as State bank of India, Bank of Baroda and Union bank of India, All banks are largecap and has majority of shareholding of government. Government introduced various reforms to financial sector in India with primarily focus on digitisation and financial inclusion to everyone in country, these banks act as a pivotal point to achieve these as PSU banks have stronger reach to masses in country which private and other banks did not have. Government also announced various schemes for providing cheap credit for poor and MSMEs to boost the local village industries and help people get line of credit easily. PSU banks had major role in opening zero balance savings account for poor and unprivileged known as Jan Dhan to further include them into the financial space.

However for past years, many PSU banks were suffering with high NPA rates, increase in bad debts, low asset quality and poor financials. Not to mention the deteorating services provided by the banks at branch level, which we could say flourished the private sector banks in India. However after the post covid years, things started to look good for banks and financials started going strong, almost all banks started posting record levels of profit and rapid decrease in NPA’s (around 14.6% in 2018 to 5.53 in December 2022) and large increase in NIMs (Net interest margins) for the banks (around 45% increase in margins from 2018 to Dec 2022). It is to be noted that these one of the reasons of increase in margins could be due to hike in repo rates by the RBI from Dec 2021 (4%) to Dec 2022 (6.25%) in small time frame.

For Industry as whole, deposits increased from Rs. 82 trillion in 2018 to 110 Trillion in 2023, almost increase of 25% in 4 years, net profits come surprisingly from LOSS OF 85000 Crore to PROFIT of Rs. 105000 Crore, banks which were deemed as burden for government soon become major source of revenue to them, market cap has more than doubled from Rs. 4.52 lakh crore in 2018 to Rs 10.63 lakh crore in 2022. Meanwhile Provision coverage ratio, which indicate the percentage of funds that a bank sets aside for losses due to bad debts, has seen tremendous growth from just 46% in 2018 to 90% in 2023. Total assets in public sector banks has seen increase in growth of 27% during that period

With positives in financials coming up with Public sector banks, the shares of banks also seen large growth in previous year, with major PSU banks’s shares increased by 100% in short duration. However in today’s date, these shares somewhat undervalued with average P/E of just 8 of banks. It could be said that we could see rally in upcoming days in PSU sector banks if financials stood on positives.

Financials of bank-

1. PnL Statement

2. Balance sheet

3. Cash Flow Statement

Bank has achieved the key milestone of crossing 20.42 lakh crore global business with healthy growth in both deposits and advances in FY 2022-23. For the first time in years Bank has achieved the five-digit Net Profit of 10,604 crores, during FY 2022-23 with a y-o-y growth of 86.76%

During FY 2022-23, the global business of the Bank increased to `20,42,001 crores, up by 11.73% y-o-y with global deposits growing at a pace of 8.54% y-o-y to `11,79,219 crores and global advances growing by 16.41% y-o-y to `8,62,782 crores. The enhanced thrust on domestic business resulted in the growth of 9.99% y-o-y to `19,12,508 crores with domestic deposits growing by 6.52% y-o-y to `10,94,746 crores and domestic advances growing by 15.01% y-o-y to `8,17,762 crores. As at March 2023, Retail Term deposits registered a growth of 4.52% y-o-y to `4,61,737 crores. Also, as at March 2023, CASA deposits are at `3,66,472 crores with savings deposits at `3,18,818 crore and current deposits at `47,654 crores. The domestic CASA ratio of Bank stood at 33.48% as on March 2023 while maintaining a strong deposits clientele base of around 10.77 crores

The Bank had been always keen on maintaining a well-balanced asset mix, encompassing sectors such as Agriculture and Micro, Small and Medium Enterprises (MSMEs) as well as keeping a focus on retail assets, including Housing, Education, and Vehicle loans. This year Bank’s core retail portfolio grew by 10.91% y-o-y to `1,40,051 crores with Housing loans growing by 14.27% y-o-y to `84,364 crores, vehicle loans growing by 7.26% y-o-y to `15,129 crores and education loan growing by 13.65% y-o-y to `14,746 crores.

Advances to Agriculture and allied activities recorded a growth of 21.24% y-o-y to `2,13,327 crore and advances to MSME segment stood at `1,23,627 crore, a y-o-y growth of 3.87% as at March 2023. In order to increase credit flow to this segment, in FY 2022-23 the Bank has launched various need-based schemes and products catering to the needs of specific segments.

For FY 2022-23, the total Income of the Bank increased by 20.11% y-o-y to `1,03,187 crores and non-Interest Income increased by 13.73% y-o-y to `18,762 crores. The net interest income, the difference between interest paid and interest earned by the Bank, grew by 19.14% y-o-y to `31,435 crores as at March 2023. In terms of ratios, the cost to income ratio for Bank improved by 137 bps to 44.79% in March 2023 from 46.16% in March 2022. Also, the yield on advances have gone up by 48 bps, increasing from 7.22% in March 2022 to 7.70% in March 2023. The Gross NPA ratio declined by 216 bps y-o-y to 5.35% this year and Net NPA declined by 92 bps y-o-y to 1.73%. Provision Coverage Ratio (PCR) improved by 314 bps y-o-y to 87.31% as at March 2023.

The Bank has recorded robust growth of 86.76% y-o-y in net profit to `10,604 crores in FY 2022-23 with operating profit growing by 20.04% y-o-y to `27,716 crores. NIM stood at 2.95% and Yield on Advances at 7.70%. Your Bank has a comfortable capital cushioning with Capital Adequacy Ratio, under Basel III at 16.68% as at March 2023 against the regulatory requirement of 11.5%.

Key Negatives about the bank

1. There had been steep increase in repo rates by RBI and bank has much profit from it. However bank could see potential drop in incomes when RBI soon start announcing rate cuts.

2. The majority of shareholding is present with government, which can sometimes lead to bureaucratic decision-making processes. In 2019, Finance ministry announced merger of syndicate bank with canara bank due to high debt and high NPA of the bank. These decisions were made in favour to save debt ridden bank and its depositors to go bankrupt, however such decisions affects the profits of merger bank at most.

3. Technology wise, bank still lags in comparison of private sector banks, which has better service quality and technology

4. With rise of new banks, Canara bank faces stiff competition in many areas, such as small finance banks in microfinance sector, Private banks in corporate finance sector, Leading NBFCs in lending and finance sector and foreign banks in foreign banking services.

5. Other macro-economic factors could impact the bank's loan portfolio quality, credit growth, and overall financial stability

Valuations-

Bank has TTM P/e of 4.87, which is lowest among the PSU banks, also bank has very low P/B ratio of 0.75, which makes bank attractive in its valuations. However it is to be noted that bank has reported negative cash flow of Rs. 40000 Crores, which is generated due to large increase in advances. Still bank has high Cash & Cash Equivalent.

Technical Analysis

In the starting decade of 2000s, bank has exceptionally performed from median rates of Rs. 27 in 2000 till the peak of Rs. 642 in 2010, growth of 23 times in ten years.

However with shifting focus of government on banking sector, stock had seen constant downfall from peak level of 2010 till 2020 where stock price declined to just Rs. 72

But after COVID years, bank has seen growth in stock price with CAGR of 47% from past 3 years and broke 2 critical resistance levels of Rs. 105.2 and Rs. 145 subsequently

In both weekly and daily chart, stock is clearly in uptrend with minor corrections from peak and continued to form higher high patterns in the chart.

If we look upon the chart, stock has followed 200 day SMA from past 3 years, which it act as major support for the stock. if we look at current levels, 200 SMA is Rs. 300 and 50 SMA is 322 which act as minor support level. Recently stock has reach peak level of Rs. 350 previous month and has seen minor correction from that level. The nearby support for the stock is Rs. 325 followed by Rs. 300.

RSI of the stock looks promising and stood at levels of 48, meaning the stock is neither in overbought nor in oversold territory.  

Targets for the bank would be Rs. 364 at short term and Rs. 400/515/642 at longer horizon of at least 2-3 years.

From past years, PSU bank stocks are exceptionally performing followed with their robust growth rates and reported profits, still many are corrected 60-70% from their ATH’s. It could be possible for PSU banks as well as canara bank to reach ATH levels in upcoming years if their growth story is still followed.

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