Canara Bank

July 3, 2014

Initiating Coverage Buy

Industry PSU Bank Founded in July 1906 at Mangalore and nationalized in 1969,
CMP (Rs) 459 Canara Bank has today transformed into a Financial
FY16E Target Price (Rs) 720 Conglomerate with presence in life insurance, home finance,
52 Week H/L (Rs) 498 / 190 asset management, venture capital, factoring and other financial
Volumes (BSE+NSE)* 5088150 services apart from having a lucrative core business of retail and
Shares O/S (mn) 461.3 wholesale banking. As on March 31, 2014 it had a network of
Market Cap (Rs mn) 211833.1 4755 branches and 6312 ATMs covering 3572 centres.
Free Float (%) 31.0
Bloomberg CBK IN Investment Rationale
Reuters CNBK.BO
Canara Bank has been one of the faster growing large PSU
*Three month average
banks in FY14 with an advances growth of 24.3% as
Share Holding Pattern (31/03/2014) against the PSU banks average of 12.6%. Going ahead, we
Shares Holding expect advances to grow at a CAGR of 19% over FY14-
Particulars
(mn) (%) FY16E from Rs 3010.7bn in FY14 to Rs 4263.1bn in FY16E.
Promoters 318.3 69.0 This growth will take place on account of faster growth in
FIIs 41.4 9.0 the retail and SME advances.
DIIs 60.3 13.1 Going ahead as the higher yielding Retail and SME
Others 41.3 8.9 advances continue to grow faster and CASA ratio improves
Total 461.3 100.0 aided by contribution of newer branches and shedding of
Source : BSE
bulk deposits, we expect NIM to improve to 2.35% in
FY15E from 2.27% in FY14.
Good potential for fee income growth as credit growth
Financial Highlights picks up and contribution from third party sales rises.
(Rs bn) FY14 FY15E FY16E
Besides this, it had a higher proportion of AFS investments
Op. Income 128.8 156.4 185.4
NIM (%) 2.3 2.4 2.4
at 32% of investments with a duration of 3.8 years, which
PAT 24.4 29.9 41.8 provides potential for good treasury gains if bond yields
PAT Growth (%) -15.1 22.6 39.7 decline significantly in FY15E.
EPS (Rs) 52.9 58.5 81.7 Best asset quality with gross NPA levels of 2.5% in FY14,
ABV (Rs) 393.6 476.5 533.5 lowest amongst top 5 large PSU banks and 2nd lowest
P/ABV (x) 1.2 1.0 0.9 amongst all PSU banks.
RoAE (%) 8.9 9.4 11.6 Has presence in 8 international locations and plans to
RoAA (%) 0.5 0.6 0.7 expand reach to Germany, Dubai, Brazil, Tanzania, Japan,
Nigeria and Qatar in FY15. It expects overseas branches to
contribute 10% to its business in FY15 from 5.7% in FY14.
Its subsidiaries in asset management, housing finance and
life insurance are performing well and are expected to add
value in the long term.

Valuations
Analyst: Rati J. Pandit, CFA We have valued Canara Bank by attaching a multiple of 1.3x
+91- 22- 40287021 FY16E ABV to its standalone business (45% discount to peak
rati@qsmail.com
multiple of 2.4x) and arriving at a standalone value per share of
702.7. To this we have added value derived from other
subsidiaries of Rs 17.5 per share (considering a holding company
discount of 40%) and thus arrive at our price target of Rs 720.
Considering the banks growth prospects in improved economic
conditions, expanding international reach, expected improvement
in margins and asset quality and attractive valuations at 0.9x its
FY16E ABV, we recommend investors to Buy Canara Bank.
 Quantum Securities

Company Profile
Founded in July 1906 at Mangalore and nationalized in 1969, Canara Bank has today transformed into a
Financial Conglomerate with presence in life insurance, home finance, asset management, venture capital,
factoring and other financial services apart from having a lucrative core business of retail and wholesale
banking. As on March 31, 2014 it had a network of 4755 branches and 6312 ATMs covering 3572 centres. It
has international branches in London, Leicester, Sanghai, Bahrain, New York, Johannesburg and Hong Kong,
one representative office in Sharjah and has a JV with SBI in Moscow. With a loan book size of Rs 3010.7bn
as on March 31, 2014 it was the 5th largest PSU bank.

Key Management Personnel

Name
R. K. Dubey
Ashok Kumar Gupta
V. S. Krishnakumar
Pradyuman Singh Rawat
Source: Company
Designation
Chairman & Managing Director
Executive Director
Executive Director
Executive Director

Investment Rationale

One of the Faster Growing Large PSU Banks

Canara Bank has been one of the faster growing large PSU banks in FY14 with an advances growth of 24.3%
as against the PSU banks average of 12.6%. This growth mainly took place on the back of robust growth in
the SME and Retail advances.

Advances Growth (%) PSU Banks Average Canara SBI PNB BOB BOI
FY14 Growth 12.6 24.3 15.7 13.1 21.0 28.1
Source: Company, RBI, QS Research

Canara Banks current portfolio is tilted towards corporate advances, with the same constituting 43.8% of the
total advances. Out of corporate advances, infrastructure advances constitute 19.2% of the gross advances.
Within the infrastructure segment, power sector loans constitute 66% of the infrastructure advances. Within
the power segment, SEBs constitute 60.1% of the power portfolio. In the retail segment, home loans is the
major segment forming 59% of retail credit, followed by other personal loans, education loans and vehicle
loans.

Source: Company, QS Research

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Source: Company, QS Research

Source: Company, QS Research

The current advances mix is expected to change as the higher yielding Retail and SME advances are expected
to grow faster. Going ahead, we expect advances to grow at a CAGR of 19% over FY14-FY16E from
Rs 3010.7bn in FY14 to Rs 4263.1bn in FY16E.

Deposit Mix Cost of Deposits to Improve

Canara Banks CASA stood lower at 24.5% in FY14 (as against 28.3% in FY11) as retail term deposits grew at
a higher rate of 95.9% and 27.7% in FY13 and FY14 respectively. In Q1FY15, the bank has shed bulk
deposits and at present bulk deposits stand at less than 13% of deposits as against 15.3% of deposits in
FY14. We expect the CASA ratio to improve to 28% by FY16E, aided by opening up of 600-700 new branches
each in FY15E and FY16E.

Source: Company, QS Research

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NIM to Improve
Canara Banks Net Interest Margin (NIM) declined from 3.1% in FY11 to 2.27% in FY14 due to increased cost
of funds due to increased deposit rates and erosion in the CASA ratio. Going ahead, as the higher yielding
Retail and SME advances continue to grow faster and CASA ratio improves aided by contribution of newer
branches, we expect NIM to improve to 2.35% in FY15E and remain stable in FY16E.

Source: Company, QS Research

Potential to Grow Fee and Other Income

Going ahead, the banks management is expected to focus on increasing their other income. It offers mutual
fund services, various cards (debit card, credit card), cash management and a range of other third party
products. It has referral arrangements with HDFC AMC (apart from Canara Robeco AMC) and United India
Insurance for cross selling of mutual fund and general insurance products. Besides this, cross selling of
Canara HSBC OBC Life insurance products also contributes to the fee income. The bank is targeting to grow
its fee income by 15-20% in FY15E. Besides this, it had a higher proportion of AFS investments at 32% of
investments with a duration of 3.8 years, which provides potential for good treasury gains if bond yields
decline significantly in FY15E.

Cost to Income Ratio to Remain Stable

Canara Banks cost to income ratio increased to 47.2% in FY14 from a low of 42% in FY11 due to addition of
1502 branches and 4096 ATMs during the 3 year period and higher expenses for provision for wage revision
of Rs 10bn and one time pension provisions incurred in FY14.

We expect the cost to income ratio to remain stable at 47.3% over FY14-FY16E (despite addition of 600-700
branches each in FY15E and FY16E) due to better income growth, provisions for wage revisions being lower
than FY14 due to most of the arrears provided for and the one time provision for pension liabilities incurred in
FY14, being absent in FY15.

Source: Company, QS Research

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Best Asset Quality Amongst Large PSU Banks

In FY14, Canara Bank had the lowest gross NPA level at 2.5% amongst the large PSU banks. Going ahead,
Canara Banks management expects to end FY15E with gross NPAs of 2% and net NPA levels of 1-1.25%. Its
restructured assets stood at Rs 266bn forming 8.8% of advances and of these restructured assets, 11.1%
had slipped into NPA. Its restructuring pipeline for first 2-3 quarters of FY15E is expected to be Rs 30bn, out
of which 50% comprises of loan given to an infrastructure company. As per our conservative estimates, we
have expected its gross NPA levels to decline to 2.1% and 1.9% in FY15E and FY16E respectively, aided by
decline in slippages with improvement in the economic conditions and higher recoveries.

PSU Banks Asset Quality FY14

Bank Name Gross NPA (%) Net NPA (%)
Allahabad 5.7 4.2
Andhra 5.3 3.1
BOB 2.9 1.5
BOI 3.2 2.0
BOM 3.2 2.0
Canara 2.5 2.0
CBI 6.3 3.8
Corporation 3.4 2.3
Dena 3.3 2.4
IDBI 4.9 2.5
Indian 3.7 2.3
IOB 5.0 3.2
OBC 4.0 2.8
PSB 4.4 3.4
PNB 5.3 2.9
SBBJ 4.2 2.8
SBI 5.0 2.6
SBM 5.5 3.3
SBT 4.4 2.8
Syndicate 2.6 1.6
UCO 4.3 2.4
Union 4.1 2.3
United 10.5 7.2
Vijaya 2.4 1.6
Source: Company, QS Research

Return Ratios to See Improvement

Canara Banks net profit declined at a CAGR of 15.4% over FY11-FY14 due to decline in margins in between
FY11-FY14, higher wage revisions, pension provisions and rise in investment provisions in FY14. Going ahead,
as the asset quality and margins improve, we expect net profit to grow at a CAGR of 30.9% over FY14-FY16E
from Rs 24.4bn in FY14 to Rs 41.8bn in FY16E. This will result in an improvement in the Return on Average
Assets (RoAA) and Return on Average Equity (RoAE) from 0.5% and 8.9% in FY14 to 0.7% and 11.6% in
FY16E respectively (After considering raising Rs 25bn Tier I Capital in FY15E).

Source: Company, QS Research

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Capital Adequacy to Improve with Fund Raising

Canara Banks capital adequacy ratio stood low at 11.1% with a decent Tier I Capital ratio at 8% in FY14.
Going ahead, as GOI has said that it will provide limited capital infusion to PSU banks in FY15, Canara Bank is
planning to raise Rs 25bn by way of Tier I Capital in FY15E. We have assumed a price of Rs 500 per share for
this fund raising which is expected to result in a dilution of 10.8%.

Expanding International Presence

As of March 31, 2014, Canara Bank had 5 international branches in London, Leicester, Hong Kong, Sanghai and
Bahrain, one representative office at Sharjah and one JV with SBI in Moscow. All these contributed 5.7% to the
banks business. It has recently opened branches in Johannesburg and New York in Q1FY15 and plans to
expand its reach to Germany, Dubai, Brazil, Tanzania, Japan, Nigeria and Qatar in FY15. It expects its overseas
branches to contribute 10% to its business in FY15.

Major Subsidiaries Adding Value

Subsidiary Name
Canbank Venture Capital Fund Ltd
Canbank Financial Services Ltd
Canara Bank Securities Ltd
Canbank Factors Ltd
Canbank Computer Services Ltd
Canara Robecco Asset Management
Company Ltd
Canara HSBC Oriental Bank of
Commerce Life Insurance Company
Can Fin Homes Ltd
Pragathi Gramin Bank
South Malabar Gramin Bank
Commercial Indo Bank LLC
Source: Company, QS Research
Stake (%) Description
AUMs of its 5 funds totaled Rs 6.2bn in FY14. One fund of Rs 5bn is expected
100 to be launched in September 2014.
Con?ned its activities to legal matters arising out of past transactions in
securities, besides concentrating on collection of lease rentals and recovery of
100 dues under decreed accounts. PAT at Rs 442.7mn in FY14.
Diversi?ed into capital market related activities, mainly stockbroking since
2007. Client base, turnover and PAT at 31000, Rs 143.6bn and Rs 60.7mn
100 respectively in FY14.
Factoring Subsidiary of the Bank involved in invoice discounting, sales ledger
administration, debt collection and advisory services. Turnover and PAT at
70 Rs 27.1bn and Rs 106mn respectively in FY14.
Engaged in software development, BPO, ATM management and Registrar &
Share Transfer services. Turnover and PAT at Rs 330mn and Rs 54.3mn
69.14 respectively in FY14.
It had AUM of Rs 66.4bn as on June 30, 2014 (source: AMFI, includes amount
51 under fund of funds).
Managed to breakeven in its 5th year of operations and had a statutory profit
51 of Rs 662mn in FY14
Rapidly growing HFC with a loan book of Rs 58.7bn and PAT of Rs 757.1mn in
FY14. For greater details pls refer to our report on Can Fin Homes Ltd dated
42.35 July 1, 2014.
35 Regional Rural Bank
35 Regional Rural Bank
40 JV with SBI in Moscow. Had PAT of USD 4.07mn in FY14.

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Valuations
We have valued Canara Bank by attaching a multiple of 1.3x FY16E ABV to its standalone business (45%
discount to peak multiple of 2.4x) and arriving at a standalone value per share of Rs 702.7. To this we have
added value derived from other subsidiaries of Rs 17.5 per share (considering a holding company discount of
40%) and thus arrive at our price target of Rs 720. Considering the banks growth prospects in improved
economic conditions, expanding international reach, expected improvement in margins and asset quality and
attractive valuations at 0.9x its FY16E ABV, we recommend investors to Buy Canara Bank.

Price Target Calculation

Particulars Amount (Rs mn)
Intrinsic P/BV (x) (FY16E) 1.3
Projected Market Capitalization FY16E (excluding revaluation reserves) 413863.4
Less: Net NPA FY16E 47210.8
Less: Cost of Investment in Subsidiaries 7392.2
Adj. Market Capitalization 359260.4
Standalone Value per Share (Rs) 702.7
Canara Robeco AMC (3% of June 2014 AUM) 1.2
Canara HSBC OBC Life (8x FY14 Profits) 3.2
Can Fin Homes (1.5x FY16E ABV) 6.7
Other Subsidiaries & JVs (SOTP) 6.4
Price Target (Rs) 720.2
Source: QS Research

Peer Comparison
Loan
CMP Mcap P/BV (x) P/E (x) RoAA (%) RoAE (%) Book
Particulars (Rs) (Rs mn) FY15E FY16E FY15E FY16E FY15E FY16E FY15E FY16E (Rs bn)
SBI 2701.1 2016560.2 1.6 1.4 14.0 11.1 0.7 0.8 11.6 13.3 12098.3
PNB 989.1 358105.3 0.9 0.8 8.9 7.3 0.7 0.7 10.8 11.9 3492.7
BOB 880.4 379149.1 1.0 0.9 7.2 5.9 0.8 0.8 14.1 15.1 3970.1
BOI 304.2 195600.6 0.9 0.8 6.2 5.1 0.5 0.5 10.1 11.2 3707.3
Canara 459.3 211833.1 0.8 0.7 7.9 5.6 0.6 0.7 9.4 11.6 3010.7
Average 632249.7 1.0 0.9 8.8 7.0 0.6 0.7 11.2 12.6 5255.8
Source: QS Research, Bloomberg Consensus Estimates

Note: Canara Bank trades at attractive valuation of 0.7x its FY16E book value as against peer group average of 0.9x FY16E book value.

Investment Concerns
Adverse economic conditions due to poor monsoon or higher global oil prices can impact growth.
Slippage in asset quality beyond our estimates.
Compression in margins due to high competition or RBI tightening.
Mr R K Dubey is due for retirement in September 2014. So with the change of guard, the banks
strategy may change significantly which can be an upside or downside risk.

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Income Statement
Particulars (Rs mn) Y/E March FY12 FY13 FY14 FY15E FY16E
Interest on Advances 234434.2 243799.1 284573.3 337237.9 392942.6
Income from Investments 70447.3 91124.2 102510.8 109649.5 125062.9
Interest on Balances with RBI 3622.1 5852.3 7308.2 8769.8 10523.8
Others Interest 2.6 3.8 1083.9 1300.6 1560.8
Interest Earned 308506.2 340779.4 395476.1 456957.9 530090.0
% Change YoY 33.8 10.5 16.1 15.5 16.0
Interest Expended 231613.1 261989.4 306031.7 347662.2 400222.0
% Change YoY 52.0 13.1 16.8 13.6 15.1
Net Interest Income (NII) 76893.1 78789.9 89444.5 109295.7 129868.0
% Change YoY -1.7 2.5 13.5 22.2 18.8
Other Income 29276.0 31530.1 39327.6 47080.3 55505.8
Net Income Earned 106169.1 110320.0 128772.0 156376.1 185373.8
% Change YoY 0.9 3.9 16.7 21.4 18.5
Payments to Employees 29730.9 32535.6 36723.8 44538.8 53808.0
Depreciation 1568.9 1896.9 2284.7 3486.8 3661.2
Other Operating Expenses 15437.7 16987.4 21801.6 26162.0 30086.3
Operating Expenditure 46737.4 51419.9 60810.1 74187.5 87555.4
Pre Provisioning Profits 59431.6 58900.1 67961.9 82188.5 97818.4
% Change YoY -2.7 -0.9 15.4 20.9 19.0
Provisions and Contingencies 18604.5 22179.1 37330.0 44336.7 42114.9
Profit Before Tax 40827.1 36721.0 30631.9 37851.8 55703.5
Provison for Tax 8000.0 8000.0 6250.0 7948.9 13925.9
Net Profit 32827.1 28721.0 24381.9 29902.9 41777.6
% Change YoY -18.5 -12.5 -15.1 22.6 39.7

Balance Sheet
Particulars (Rs mn) Y/E March FY12 FY13 FY14 FY15E FY16E
SOURCES OF FUNDS
Equity Capital 4430.0 4430.0 4612.6 5112.6 5112.6
Reserves 222469.6 244347.9 291588.5 338215.2 369823.9
Net Worth 226899.6 248777.9 296201.1 343327.8 374936.5
Demand Deposits 148185.1 148931.5 177437.9 221797.4 277246.7
Savings Deposits 647922.2 711681.9 855356.1 1111962.9 1401073.2
Term Deposits 2474429.9 2697946.6 3174434.2 3648213.6 4316635.5
Deposits 3270537.3 3558559.9 4207228.2 4981973.8 5994955.4
Borrowings 155253.9 202833.7 272306.4 326767.6 392121.2
Other Liabilities 88911.2 113254.5 143482.9 179353.6 224192.0
Total Liabilities 3741601.9 4123426.1 4919218.5 5831422.8 6986205.0
APPLICATION OF FUNDS
Cash and Balances with RBI 177951.4 154059.3 221537.8 249098.7 299747.8
Balances with Banks 103842.7 193087.7 226749.3 355176.3 445065.3
Investments 1020574.3 1211328.3 1268282.6 1466700.9 1753127.4
Net Advances 2324898.2 2421766.2 3010674.8 3552596.2 4263115.5
Fixed Assets 28575.4 28627.2 66415.6 69736.4 73223.2
Other Assets 85760.1 114557.3 125558.5 138114.3 151925.8
Total Assets 3741601.9 4123426.1 4919218.5 5831422.8 6986205.0
Contingent Liabilities 1928712.5 2497075.5 2230514.5 2632007.1 3158408.5
Bills for Collection 124965.1 139977.9 162689.2 191973.2 230367.9
Total Business 5595435.5 5980326.2 7217903.0 8534570.1 10258070.9
% Change YoY 10.5 6.9 20.7 18.2 20.2

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Dupont Analysis
RoA Decomposition Y/E March FY12 FY13 FY14 FY15E FY16E
% of Average Assets
Net Interest Income 2.2 2.0 2.0 2.0 2.0
Non-Interest Income 0.8 0.8 0.9 0.9 0.9
Net Income 3.0 2.8 2.8 2.9 2.9
Operating Expenses 1.3 1.3 1.3 1.4 1.4
Operating Profit 1.7 1.5 1.5 1.5 1.5
Provisions 0.5 0.6 0.8 0.8 0.7
Taxes 0.2 0.2 0.1 0.1 0.2
RoA (%) 0.9 0.7 0.5 0.6 0.7
Avg. Assets / Avg. Equity (x) 16.6 16.5 16.6 16.8 17.8
RoE (%) 15.4 12.1 8.9 9.4 11.6

Ratios
Key Ratios Y/E March FY12 FY13 FY14 FY15E FY16E
Valuation
EPS (Rs) 74.1 64.8 52.9 58.5 81.7
Adj BVPS (Rs) 389.1 396.5 393.6 476.5 533.5
PER (x) 6.2 7.1 8.7 7.9 5.6
P/Adj BV (x) 1.2 1.2 1.2 1.0 0.9
Dividend Yield (%) 2.4 2.8 2.4 2.8 3.7
Payout (%) 17.3 23.5 24.3 26.0 24.3
Growth (%)
NII -1.7 2.5 13.5 22.2 18.8
Advances 9.4 4.2 24.3 18.0 20.0
Deposits 11.3 8.8 18.2 18.4 20.3
Net Profit -18.5 -12.5 -15.1 22.6 39.7
EPS -18.5 -12.5 -18.5 10.6 39.7
Profitability (%)
Yield on Advances 10.5 10.3 10.5 10.3 10.1
Yield on Investments 7.6 8.2 8.3 8.0 7.8
Cost of Deposits 7.1 7.4 7.4 7.0 6.7
Cost of Funds 6.9 7.1 7.2 6.8 6.5
Interest Spread 2.8 2.7 2.8 3.0 3.1
Net Interest Margin 2.4 2.3 2.3 2.4 2.4
Cost/Income 44.0 46.6 47.2 47.4 47.2
CASA 24.3 24.2 24.5 26.8 28.0
RoAE 15.4 12.1 8.9 9.4 11.6
RoAA 0.9 0.7 0.5 0.6 0.7
Balance Sheet Ratios
Credit/Deposit 71.1 68.1 71.6 71.3 71.1
Investment/Deposit 31.2 34.0 30.1 29.4 29.2
Productivity Ratios (Rs mn)
Business per Employee 132.4 140.1 147.9 155.8 167.4
Profit per Employee 0.8 0.7 0.5 0.5 0.7
Business per Branch 1554.3 1604.2 1518.0 1593.8 1694.1
Gross Profit per Branch 16.5 15.8 14.3 15.3 16.2
Capital Adequacy (%)
Capital to Risk Weighted Assets Ratio 13.8 12.4 11.1 11.9 10.7
Tier I Capital Ratio 10.4 9.8 8.0 9.3 8.5
Asset Quality (%)
Gross NPA 1.7 2.6 2.5 2.1 1.9
Net NPA 1.5 2.2 2.0 1.3 1.1
Provision Coverage 14.8 14.9 20.6 40.6 42.5

Disclaimer: This document is based on information obtained from sources believed to be reliable. We do not make any representation or war ranty as to its accuracy,
completeness or correctness. Opinions & theories expressed are based on present circumstances & judgment and are subject to change without notice. Quantum Securities
Pvt. Ltd. accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or further communication given in relation to this
document. Quantum Securities Pvt. Ltd. and its associates, directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein
and may also perform or seek to perform broking, investment banking and other banking services for these companies. If annualized returns are greater than 15%, then
the stock is rated as BUY, between a range of 10-15% is rated as Accumulate. If annualized returns are lower than -15%, then the stock is rated as SELL, between a range
of -10% to -15% is rated as Reduce. In the range of +/ (- ) 10%, the stock is rated as Hold. However, within this zone we may choose to give an Accumulate, Reduce or
Hold rating.

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