Canara Bank’s strong loan growth and NIM beat support BUY upgrade

Investment View and Recommendation

JM Financial Institutional Securities’ October 14, 2026 report upgrades Canara Bank to BUY from ADD and raises the 12-month target price to Rs 150 from Rs 142.

The positive view is based on strong loan momentum, steady margins, improving asset quality and what JM Financial considers inexpensive valuations. Canara Bank’s share price had been flat over the preceding year despite approximately 14 per cent growth in book value.

JM Financial believes the bank is relatively less exposed to potential disruption from the IRDAI paper because insurance fee income was only 2.2 per cent of FY26 profit before tax, compared with 5.1 per cent for the broker’s coverage universe.

Q2 FY27 Financial Performance

Canara Bank reported a healthy Q2 FY27. Net interest income increased 20 per cent year on year and 8 per cent quarter on quarter to Rs 11,000 crore, which was 5 per cent above JM Financial’s estimate. Reported net interest margin rose 3 basis points quarter on quarter to 2.55 per cent as loan yields increased faster than cost of funds.

Operating profit growth was partly offset by an 87 per cent year-on-year fall in profit on sale of investments and muted fee income. Provisions declined 24 per cent year on year, supporting the increase in profit after tax.

Loan and Deposit Growth

Advances grew 20.4 per cent year on year and 6.5 per cent quarter on quarter, led by a 58 per cent year-on-year rise in overseas advances. Domestic advances increased 17 per cent year on year and 4.8 per cent quarter on quarter, with broad-based growth across agriculture, MSME and retail.

• Retail advances rose 31.6 per cent year on year.
• Agriculture advances increased 14.3 per cent year on year.
• MSME advances increased 15.5 per cent year on year.

Deposits grew 13 per cent year on year and 5 per cent quarter on quarter, aided by around USD 5.8 billion, or Rs 55,000 crore, of FCNR(B) deposits. The lag in deposit growth pushed the global credit-to-deposit ratio to 80.2 per cent, up 485 basis points year on year. Management retained FY27 growth guidance but expects to exceed it. JM Financial forecasts loan and deposit growth of 16 per cent and 14 per cent respectively over FY26 to FY29.

Margins and Asset Quality

Management expects net interest margin to remain around 2.5 per cent to 2.6 per cent. The approximately USD 3.2 billion FCNR(B) leverage book earns a thin 40 to 50 basis point spread and may slightly moderate margins, although management expects robust NII growth and core lending yields to compensate.

Asset quality remained benign. Gross and net slippage ratios were broadly unchanged quarter on quarter at 0.58 per cent and 0.23 per cent, while gross and net NPA ratios improved 24 basis points and 7 basis points to 1.33 per cent and 0.30 per cent. Calculated credit cost eased 13 basis points quarter on quarter to 0.54 per cent.

Management stated that it sees no stress in the loan book, with slippages below recoveries. However, exposure to drought-affected areas in Maharashtra and Karnataka is around Rs 13,000 crore to Rs 14,000 crore and may require restructuring or other relief, although management expects only a modest asset-quality impact.

Expected Credit Loss Transition and Treasury Income

A key swing factor is the transition to expected credit loss accounting. Management increased its one-time ECL estimate, including held-to-maturity mark-to-market effects, to Rs 12,000 crore to Rs 15,000 crore and plans to phase it over about two years.

Treasury income was weak because yields hardened. However, about 80 per cent of the investment book is held to maturity, around 15 per cent is available for sale and only around 4 per cent is in HFT or other categories, limiting profit and loss volatility. The estimated Rs 1,300 crore available-for-sale loss for the quarter was adjusted through reserves rather than profit and loss.

Earnings Estimates and Valuation

JM Financial raises FY27E and FY28E EPS by 6 per cent and 5 per cent respectively. It forecasts FY27E to FY29E return on assets of about 1 per cent and return on equity of 17.6 per cent.

The resulting target price is Rs 150.