Canara Bank loan growth and improving asset quality underpin FY27 earnings outlook

Investment View and Valuation

Motilal Oswal Financial Services (MOFSL), in its July 27, 2026 results update, retains a BUY rating on Canara Bank with a target price of Rs 160, compared with the CMP of Rs 127. The broker views the 1QFY27 performance as steady, with stable margins and strong other income supporting earnings despite higher-than-expected provisions. Asset-quality metrics also improved.

MOFSL expects net interest margins to remain range-bound at 2.5-2.6 per cent in FY27. Its target price is based on 1.1x March 2028E adjusted book value, plus Rs 13 per share for subsidiaries.

1QFY27 Financial Performance

Canara Bank reported standalone 1QFY27 PAT of Rs 4,860 crore, up 2 per cent year-on-year and 8 per cent quarter-on-quarter, and 10 per cent above MOFSL estimates. Net interest income rose 13 per cent year-on-year and 4 per cent quarter-on-quarter to Rs 10,220 crore, broadly in line with the broker's estimate. NIM declined 2 basis points sequentially to 2.52 per cent, below MOFSL's 2.57 per cent estimate.

Total revenue rose 16 per cent year-on-year and 5 per cent sequentially, representing a 9 per cent beat. Despite higher operating expenses, the improved cost-to-income ratio supported a 28 per cent sequential increase in pre-provision operating profit.

Loan and Deposit Growth

Business momentum remained healthy. The loan book grew 19.0 per cent year-on-year and 4.7 per cent sequentially to Rs 12.77 trillion, led by retail and MSME lending. Retail loans grew 33 per cent year-on-year and 7.7 per cent sequentially, while MSME loans increased 15.1 per cent year-on-year and 6.9 per cent sequentially.

• Gold loans: The gold-loan book stood at Rs 2.59 trillion, including agricultural gold loans of about Rs 1.5 trillion.
• Deposits: Deposits rose 11.6 per cent year-on-year and 2.7 per cent sequentially to Rs 16.12 trillion.
• CASA: CASA deposits grew 10.6 per cent year-on-year, with the CASA ratio at 29.7 per cent.
• Credit-to-deposit ratio: The ratio increased to 79.3 per cent from 77.8 per cent in 4QFY26, indicating that deposit growth lagged loan growth.

Management retained its FY27 loan-growth guidance of 11-12 per cent and said its priority is efficiency over growth while balancing both. Under the new managing director, the bank is focusing on improving deposit granularity and aims to mobilise USD 2.3-2.5 billion through FCNR(B) deposits, OFCBs and ECBs.

Improving Asset Quality, but Higher Provisions

Asset quality improved in 1QFY27. Slippages declined to Rs 1,800 crore from Rs 2,800 crore in 4QFY26. Gross and net NPA ratios fell by 27 and 7 basis points sequentially to 1.57 per cent and 0.36 per cent, respectively. The provision coverage ratio stood at 77.1 per cent.

Reported credit cost declined to 0.49 per cent from 0.59 per cent in 4QFY26. However, the SMA book of Rs 5 crore and above increased to 0.58 per cent from 0.46 per cent. Provisions of Rs 2,080 crore were 13 per cent above MOFSL estimates and rose 110 per cent sequentially.

A key prospective pressure is the expected-credit-loss transition. Canara Bank plans to make additional provisions of Rs 10,000-12,000 crore, which is estimated to reduce CRAR by 1.20-1.25 per cent.

Management Guidance and Estimates

Management reported that advances growth and business growth exceeded its earlier guidance. 1QFY27 RoA and RoE were 1.04 per cent and 18.31 per cent, respectively. The bank retained its FY27 NIM guidance of 2.5-2.6 per cent and RoA guidance of 1 per cent.

MOFSL marginally increased its estimates, forecasting FY27E NII of Rs 43,480 crore, PAT of Rs 20,060 crore, RoA of 1.01 per cent and RoE of 17.9 per cent. For FY28E, it forecasts PAT of Rs 23,060 crore, RoA of 1.04 per cent and RoE of 19.0 per cent.

Investment Thesis and Key Risks

The investment thesis is supported by retail- and MSME-led loan growth, stable margins, improving asset quality and earnings from other income.

Key risks and watch items identified by MOFSL include:

• Deposit growth trailing credit growth.
• Potential margin pressure.
• Higher provisioning.
• The capital impact of the expected-credit-loss transition, including the estimated 1.20-1.25 per cent reduction in CRAR.