Recommendation from Banking Sector

This column gives you a scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

CANARA BANK: POSTING A POSITIVE PERFORMANCE

HERE IS WHY
✓ Holds top spot in the league of banks
✓ Increase in net profit by 64.18 percent
✓ Improving customer service

Despite the recent volatility in the global banking system, the Indian banking sector has demonstrated remarkable resilience. Additionally, we are currently observing credit growth and improvement in asset quality. According to a report by PwC, the banking sector in India is projected to achieve a compound annual growth rate of 10 per cent from 2022 to 2027. Given the resilience of our banking system and the significant growth potential in the future, our recommendation for choice scrip is Canara Bank. It now holds one of the top spots in the league of Indian banks. 

The businesses of the bank are majorly in the four areas of personal banking, corporate banking, NRI banking and the SME sector. In Q4FY23, on a consolidated basis the bank’s total income grew by 29.59 per cent YoY to ₹31,774.04 crore from ₹24,518.42 crore in the corresponding quarter last year. The operating profit stood at ₹7,326.34 crore compared to ₹6,565.89 crore, a YoY growth of 11.58 per cent. The net profit for the Q4FY23 rose by 64.18 per cent YoY to ₹3,232.84 crore compared to ₹1,969.04 crore from the same quarter the previous year. Sequentially the net profit for Q4FY23 has increased by 10.59 per cent to ₹3,232.84 crore from ₹2,923.16 crore in Q3FY23.

For the first time the bank has made profit in five figures. For the period FY23 the bank has posted profit of ₹10,603.76 crore from ₹5,678.41 crore with growth of 86.74 per cent. The net interest income for Q4FY23 stood at ₹8,617 crore with growth of 23.01 per cent YoY from ₹7,005 crore. For FY23 net interest income was ₹31,436 crore from ₹26,384 crore with growth of 19.15 per cent. The bank’s gross NPA has decreased from 7.51 per cent in March 2022 to 5.35 per cent in March 2023. Its net NPA has also decreased from 2.65 per cent in March 2022 to 1.73 per cent in March 2023. The bank has also decreased its credit cost from 1.53 per cent in March 2022 to 1.17 percent in March 2023.

The management has set credit growth guidance for FY24 at 10.5 per cent with NIMs to be 3.05 per cent versus 2.95 per cent in FY23. The management has also guided for 1 per cent ROA for FY24. The bank has well-diversified loans in FY23 where the MSME segment consists of 14 per cent, retail loan consists of 16 per cent, agriculture and allied sectors consist of 25 per cent and corporate and others consist of 45 per cent. The bank is increasing its digital presence with new initiatives like credit card on UPI, API banking and CBDC, virtual debit card and centralised issuance of credit cards (end to end) and cross-border inbound bill payment from Oman.

With ongoing technological advancements, the banking sector is putting a larger emphasis on offering better services to customers and enhancing its digital infrastructure to improve the overall customer experience. This gives banks a competitive advantage. The shares of Canara Bank are currently trading at a price to book value of 0.73 times as against the industry medium price to book value of 0.95 times. This makes it attractive, especially when looking at the improving trajectory of asset quality and higher return on assets. Taking into account the bank’s business and its market, we recommend BUY.