Canara Bank Q2FY27 core earnings beat strengthens NIM and loan growth outlook

Investment View and Valuation

Prabhudas Lilladher's October 15, 2026 Q2FY27 result update on Canara Bank retained a BUY recommendation following an all-round core earnings beat. The broker considers the bank's balance-sheet mix and net interest margin levers supportive of earnings. Domestic loan momentum, improving loan yields, a low loan-to-deposit ratio and repricing of external benchmark-linked loans are expected to cushion profitability.

Prabhudas Lilladher raised its target price to Rs 160 from Rs 150 while retaining its 1.0x valuation multiple and rolling the valuation forward to September 2028 adjusted book value.

Q2FY27 Financial Performance

Canara Bank reported strong core operating performance in Q2FY27, with net interest income, core pre-provision operating profit and core profit after tax exceeding Prabhudas Lilladher's estimates. Lower operating expenses also supported the earnings beat, although other income declined because of lower treasury income.

Business Growth and Loan Pipeline

Business growth remained healthy. Advances and deposits grew 20.4 per cent and 13.1 per cent year on year respectively, while the loan-to-deposit ratio rose to 80.2 per cent from 79.3 per cent in Q1FY27. Loan growth was 6.5 per cent quarter on quarter.

Excluding FCNR(B)-related loans, domestic loan growth was 4.8 per cent quarter on quarter, led by corporate loans growing 6.4 per cent and agriculture loans growing 10.2 per cent. Agriculture growth was aided by 15 per cent growth in agri-gold loans.

Management expects growth momentum to continue and retained its FY27 guidance. The corporate and mid-corporate pipeline was about Rs 47,000 crore, including Rs 30,000 crore of hot leads and Rs 17,000 crore of sanctioned but undisbursed loans. Management also expects festive demand to support higher-yielding retail loans.

Net Interest Margin Outlook and Earnings Estimates

Management expects net interest margin to sustain at about 2.55 per cent. The principal supporting factors are:

• Improved corporate and gold-loan yields.
• Repricing of the 53 per cent repo-linked loan book after the 25-basis-point rate hike.
• Further MCLR repricing.
• Retail loan demand.

FCNR(B) deposits of USD 5.8 billion, equivalent to about Rs 55,000 crore, avoided incremental bulk funding of Rs 30,000 crore to Rs 35,000 crore and were about 100 basis points cheaper than bulk deposits. However, advances funded through FCNR(B) carry a low spread of 40 to 50 basis points, partly offsetting the benefit.

The broker raised its FY27E and FY28E margin assumptions by 7 and 6 basis points respectively and increased core PAT estimates by about 6 per cent on average.

Asset Quality and Capital Position

Asset quality improved in Q2FY27. Gross NPA was 1.33 per cent and net NPA was 0.30 per cent. Lower net slippages and reversal of NPI provisions reduced overall provisions to Rs 1,780 crore versus the broker's estimate of Rs 2,220 crore.

Management reported CRAR of 17.19 per cent, CET-1 of 12.80 per cent and provision coverage of 95.34 per cent. Gross slippages of Rs 1,840 crore were led by agriculture and MSME.

Risks and Monitoring Points

• The estimated one-time expected credit loss transition provision of Rs 12,000 crore to Rs 15,000 crore is expected by management to be absorbed over two years using profitability and capital buffers.
• Exposure of about Rs 13,000 crore to drought-affected areas in Karnataka and Maharashtra could affect recoveries, although management expects relief measures to limit asset-quality deterioration.
• Margin sustainability depends on the relative repricing of deposits and advances.
• Treasury income faced a mark-to-market loss amid hardening bond yields.