Recommendation from Banking Sector

This section gives a recommendation of a stock having stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

Canara Bank : IMPROVING EARNINGS, ATTRACTIVE VALUATION PLAY

HERE IS WHY
✓ Strong recovery from written-offs
✓ All-time low Net NPA ratio
✓ Return ratios remain comfortably high

I ndia’s banking sector continues to witness robust growth, propelled by a resilient economy, expanding digital infrastructure, and rising consumer confidence. The sector’s trajectory is further strengthened by progressive policy reforms, increased financial inclusion, and the acceleration of digital banking services. Amid this dynamic environment, Canara Bank stands out as a leading public sector bank, as the bank has consistently expanded its operations, enhanced its digital capabilities, and reinforced its commitment to inclusive growth, positioning itself as a key enabler in India’s evolving financial landscape.

Founded in 1906, Canara Bank is one of India’s largest public sector banks, with a widespread presence across the country. As of Q4 FY25, the bank has 9,849 branches, serving customers in all major states and union territories. Its branch network is well-diversified across rural, semi-urban, urban, and metro centres. Canara Bank has strategically focused on strengthening its retail and MSME lending portfolio. The bank continues to drive digital transformation, offering a comprehensive suite of digital products and services to enhance customer experience and operational efficiency, while maintaining a strong emphasis on financial inclusion and sustainable growth.

Canara Bank is witnessing steady improvement in asset quality and earnings, supported by lower provisioning and strong recoveries from written-off loans. In Q4 FY25, while Net Interest Income (NII) was flat, noninterest income surged ~22 per cent YoY, primarily driven by recoveries. Loan growth remained healthy at ~12 per cent YoY, led by a ~40 per cent jump in retail loans, particularly gold loans—indicating a continued shift towards granular, lower-risk lending.

The bank’s asset quality has significantly improved, with Net NPA ratio declining from 4.34 per cent in Q4 FY20 to an all-time low level of 0.70 per cent in Q4 FY25. This was supported by controlled slippages and healthy recoveries and upgrades, helping Canara converge with peer PSU banks on asset quality metrics. Moreover, the bank’s limited exposure to unsecured retail loans (~2 per cent of the loan book) further reduces risk. With a strong CET-1 ratio of ~12 per cent and sharply lower net NPAs, the bank is positioned to benefit from a decline in credit costs going forward.

In Q4 FY25, Canara Bank reported a 33 per cent YoY increase in net profit to ₹5,003 crore, compared to ₹3,757 crore in Q4 FY24. Sequentially, profit was up by 22 per cent. Total income grew 10 per cent YoY to ₹37,353 crore, while Net Interest Income (NII) declined 1.44 per cent YoY to ₹9,441.92 crore. Asset quality continued to improve, with Gross NPA at ₹31,530 crore or 3 per cent of total advances, and Net NPA at ₹7,353 crore, translating to a Net NPA ratio of 0.70 per cent. Global deposits grew by 11.01 per cent year-on-year to ₹14,56,883 crore, while gross global advances rose by 11.74 per cent year-on-year to ₹10,73,332 crore.

Canara Bank’s stock trades at a Price to Book (P/B) ratio of 0.86x, slightly above the industry average of 0.79x and its 5-year median of 0.7x, presenting a decent valuation opportunity. Over the past three years, the bank has delivered a CAGR of 18.3 per cent in total income and 44.2 per cent in profits. Return ratios remained healthy in Q4 FY25 with an ROE of 23.23 per cent and ROA of 1.25 per cent. Given its attractive valuation and improving fundamentals, we recommend a BUY on Canara Bank.