New Gold Loan Product And Improved Asset Quality Poised To Boost Growth And Earnings

Key Takeaways

• Canara Bank's strategic focus on new gold loan products and asset quality enhancements positions it for increased revenue and better net margins.
  
• Planned IPOs and re-deployment strategies could bolster future revenue streams and enhance net interest income, driving overall earnings growth.
  
• Rising deposit costs and credit complications may affect Canara Bank's earnings, asset quality, and the feasibility of future revenue targets.

Catalysts

Provides various banking products and services in India and internationally.

• Canara Bank has introduced a new gold loan product for metropolitan cities, which is expected to drive retail credit growth significantly. This is likely to increase revenue through higher lending in this sector.
  
• The bank's net NPA has decreased to below 1%, and gross NPA has reduced to 3.73%, showcasing improved asset quality, which can lead to higher net margins due to reduced provisioning costs.
  
• There is a planned IPO of Canara Robeco AMC expected in the fourth quarter, suggesting potential future revenue streams and an increase in shareholder value.
  
• By re-deploying ₹35,000 to ₹40,000 crores from low-yielding advances to higher-yielding loans, Canara Bank aims to improve its net interest income, directly affecting earnings growth.
  
• Despite an increase in credit cost slightly above the previous quarter, the bank has managed to maintain its credit cost below its guidance of 1.10%, potentially stabilizing earnings and margins in future quarters.

Canara Bank Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Canara Bank's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.1% today to 27.0% in 3 years time.
• Analysts expect earnings to reach ₹205.2 billion (and earnings per share of ₹22.61) by about November 2027, up from ₹160.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹154.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.0x on those 2027 earnings, up from 5.5x today. This future PE is lower than the current PE for the IN Banks industry at 12.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.09%, as per the Simply Wall St company report.

Canara Bank Future Earnings Per Share Growth

Risks

• Canara Bank's net interest margin (NIM) has slightly decreased from 2.9% to 2.88%, and there is ongoing pressure from rising deposit costs which could negatively impact future earnings.
  
• The increase in credit cost from 0.9% to 0.97% due to additional provisioning for existing NPA accounts could affect net margins and profitability.
  
• Despite the growth in RAM sector credit, the shedding of low-yielding corporate advances led to slower credit growth which might impact future revenue targets.
  
• There are rising concerns regarding the SMA-2 loan accounts, particularly with exposure to government-backed and steel sector accounts, which might pose potential risks to asset quality and profitability.
  
• The bank's reliance on gold loans, particularly the new product in metropolitan areas at higher interest rates, could expose it to risks from market interest rates or gold price fluctuations, impacting future revenue and earnings.

Valuation

• The analysts have a consensus price target of ₹121.81 for Canara Bank based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹140.0, and the most bearish reporting a price target of just ₹83.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹758.5 billion, earnings will come to ₹205.2 billion, and it would be trading on a PE ratio of 8.0x, assuming you use a discount rate of 14.1%.
  
• Given the current share price of ₹97.81, the analyst's price target of ₹121.81 is 19.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.