Stock Review: CANARA BANK

Lower net interest margin, high operating cost, and poor asset quality weighed on Canara Bank's fourth quarter earnings. However, net profit rose 79% from a year ago due to rise in fee income and lower provisions. Though interest earned grew at 33.8%, its interest expense rose higher at 38.9%. Net interest income (NII), which is the spread between interest earned and interest paid, declined 7% sequentially. The fall in NII, despite robust loan growth, indicates that the bank was not able to pass on incremental cost of funds to asset side.

The state-run lender's cost-toincome ratio rose to 42.9% due to higher provisioning for retired staff. It provided for . 3.70 billion in the quarter ended March towards pension. However, pension provisioning is seen declining to . 1.26 billion from April-June quarter and improve profitability.

The bank's deposits and advance grew 25% each and creditto-deposit ratio rose a tad by 11 basis points year-on-year to 72.3%. Share of low-cost CASA deposit in total deposit was 28% at the end of March. This has led to decline in NIM by 35 bps to 2.9%. With the Reserve Bank of India's aggressive rate tightening, upside in NIM is likely to be limited.

Canara Bank, one of the largest public sector lenders in the country, has experienced inconsistent asset quality over the past three fiscals. The bank's net bad loan was 1.2% in 2008-09, which improved to 1% in 2009-10. In last fiscal, bad loans deteriorated to 1.1%.

The bank faced annual slippage of 3.9% in forth quarter, one of the highest in recent past. Rising slippages is a concern going forward as it poses threat to the bank's asset quality. At a priceto-book value of 1.35, the bank's stock seems fairly valued. Inconsistent asset quality is likely to limit any significant valuation upside. The bank needs to improve share of low-cost CASA to raise NIM.