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Informist, Wednesday, Oct. 16, 2024

By Kabir Sharma

MUMBAI – Slow credit growth and compression in net interest margin are expected to cap Canara Bank's bottom line growth to a modest 4.6% on year in the quarter ended September, according to an average of estimates from five brokerages. The state-owned bank is expected to report a net profit of INR 37.73 billion for Jul-Sept. Sequentially, the net profit is seen contracting 3.4% from INR 39.05 billion in Apr-Jun. 

The brokerages expect the bank's credit growth to moderate in Jul-Sept and Dolat Capital has projected the loan book to grow 4% from a quarter ago and 10% from a year ago. "Credit growth is anticipated to remain slow, which will also affect margins and profitability," Emkay Global Financial Services said. The slowdown in loan growth comes at a time when banks are concerned about the rising gap between deposit and credit growth.

Moderation in credit growth has been a sector-wide trend due to a slowdown in unsecured lending after the Reserve Bank of India increased risk weights on such loans in November. Banks have also started going slower on credit growth as the RBI has been repeatedly cautioning them against the high credit-deposit ratio and risks they post to structural liquidity in the banking system. According to the latest RBI data, growth in loans of scheduled commercial banks moderated to 13.0% on year as on Sep 20, compared with 17.4% at the end of the previous quarter.

The slowing credit growth and pressure from the deposit side could lead to a contraction in the bank's net interest margin, brokerages said. "NIM is expected to see a modest sequential decline, driven by a marginal increase in the cost of deposits," Kotak Institutional Equities said in a report. Canara Bank's net interest margin moderated to 2.90% in Apr-Jun from 3.05% a quarter before.

According to the information available on the bank's website, Canara Bank has not revised its retail term deposit rates since June and they range between 4.00% to 8.14%. On the lending side, the bank raised its marginal cost of funds-based lending rate on some tenures by 5 basis points effective Saturday. After the revision, the bank's MCLR lies in the range of 8.30-9.40%.

Growth in net interest income, the main source of income for banks, is also likely to remain tepid in Jul-Sept. Net interest income is seen rising 4.3% on year to INR 92.81 billion in Jul-Sept. The bank's net interest income had increased 6% to 91.66 bln rupees in Apr-Jun. 

Kotak Institutional Equities expects the bank to report lower provisions during the quarter as some improvement in asset quality is expected. The bank's provisions fell around 16.1% on year to INR 22.82 billion in Apr-Jun, of which provisions for non-performing assets fell 10.2% to INR 21.71 billion. The provision coverage ratio was 89.22% as on Jun. 30. The bank aims to have a provision coverage ratio of 95% by the end of 2024-25 (Apr-Mar), the management had said in July.

The bank's net non-performing loans may continue to trend above other public sector banks, brokerages said. The gross non-performing asset ratio of the bank was at 4.14% at the end of June, down from 4.23% a quarter ago. The net non-performing asset ratio was at 1.24% at the end of June, as against 1.27% a quarter ago.

In July, the bank's management said that the bank provided INR 5.6 billion in Apr-Jun as one significant account of a public sector company from Andhra Pradesh might turn into a non-performing asset. In its report, Emkay Global said though Canara Bank has significant exposure to state-owned Rashtriya Ispat Nigam Ltd., it may not classify it as a non-performing asset yet.

As the bank's non-performing loans are expected to remain higher than its peers, the credit cost of the bank is unlikely to decline significantly, brokerages said. The credit cost of the bank was at 0.90% at the end of June, down 20 basis points from a year ago.

Canara Bank is yet to announce the date for announcing earnings for the September quarter.

On Wednesday, shares of the bank closed 0.1% lower at INR 104.37 on the National Stock Exchange. 

Following are the Jul-Sept earnings estimates of Canara Bank based on reports compiled by Informist from five brokerage houses:

End

Edited by Saji George Titus

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