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Buy Canara Bank

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  1. #1
    insight95in
    insight95in is offline eTI Member

    Buy Canara Bank

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    Canara Bank
    BUY
    Price: Rs398 Target: Rs480 (Mar’11)


    Coverage ratio concerns exaggerated

    * Low coverage ratio but concerns exaggerated: CBK’s coverage ratio at 24.5%
    as of 3Q10 is the lowest amongst peers. However, concerns are exaggerated
    based on a) higher proportion of sub-standard and doubtful I category gross
    NPLs (99.7%) resulting in lower provisioning requirements (Exhibit 2), b)
    aggressive NPL write off policy of the bank (which results in lower effective tax
    rate; 3Q10:19%), c) coverage ratio including technical write-offs stood at
    74.04% as of 3Q10. We are factoring in a 46% increase in loan loss provisions
    and gross NPLs of c.3.1% vs. c.1.8% currently. Despite higher credit costs
    (c.105 bps vs 73bps in FY09), CBK is expected to deliver healthy ROE of c.19%.

    * Positioned for growth with strong CAR and 73.2% government ownership:
    We expect loan book growth of c.17% CAGR over FY09-12E driven by uptick in
    industrial activity and improved economic environment. We believe CBK is
    geared to capitalize on growth opportunities due to its strong CAR position
    (3Q10: CAR of 14.4% with tier I of 9.2%) and government holding of 73.2%
    (additional capital can be raised by selling government’s stake).

    * Life Insurance stake valued at Rs53 per share: CBK has a 51% stake in life
    insurance JV with HSBC and Oriental Bank. The insurance venture has been able
    to garner a market share of c.3% YTD despite stiff competition. We now ascribe
    a value of Rs53 per share for CBK from its insurance JV assuming a) market
    share of c.3.5% by FY12E amongst the private players b) NBAP multiple of 17x.

    * Significant headroom for FIIs: FII ownership in the bank is one of the lowest
    (3Q10:11.5%) over the past 5 years as against the regulatory ceiling of 20% for
    SOE banks. Given the improvement in the macro environment coupled with
    higher credit growth going ahead, we believe that significant headroom in CBK
    for FIIs could act as a technical trigger (Exhibit 3).

    * Upgrading estimates and introducing FY12E numbers; ROE to touch c.19%
    by FY12E: We raise our FY10E and FY11E earnings estimates by 53% and 25%
    respectively primarily due to higher treasury income. We also introduce FY12
    estimates and expect the bank to deliver ROE of c.19%.

    * Attractive valuations; upgrading to ‘BUY’ with TP of Rs480: Based on a
    normalized ROE of 19%, we value the banking business at 1.25x FY12E book
    implying value of Rs426 per share. Further, we value CBK’s 51% stake in the life
    insurance JV at Rs53 per share. Consequently, we raise our March’11 TP to
    Rs480 which provides an upside of c.20% from the current levels. BUY.

  2. #2
    priya0710
    priya0710 is offline eTI Iron
    Canara Bank is a good performing stock belonging to banking sector. Traders and investors should not blindly pick their stocks on the basis of false assumptions. Careful analysis is required to judge what returns it is likely to generate.

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