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Fundamental Analysis of Canara Bank: The shares of PSU banks have rallied in the last 3-4 months. Historically, public lenders always trailed their private counterparts because of asset quality issues. However, recently investors’ liking for government banks has increased as they reported better earnings and improved asset quality figures.

Canara Bank is one such PSU bank that has reported strong results lately. In this article, we’ll perform a fundamental analysis of Canara Bank.

Fundamental Analysis of Canara Bank

Today we will cover the company’s history, financials, and future plans and also conduct a detailed fundamental analysis of Canara Bank.

Canara Bank – History and Overview

Founded in 1906, Canara Bank is a large-cap public sector bank with a government shareholding of 62.93%. It was set up in Mangalore by Late Shri Ammembal Subba Rao Pai, a leading lawyer, banker, educationist, and philanthropist. 

Over its history of 116 years, the bank acquired other banks, underwent nationalization in 1969, and was merged with Syndicate Bank in 2020. 

As of the writing of this article, Canara Bank stands as the third largest public sector bank in India with a market capitalization of Rs. 52,500 crores.

The universal bank has 9,722 domestic branches, 3 international branches, and 10,750 ATMs serving over 10.4 crore customers. It offers both services:

  1. personal banking covering savings & deposits, loan products, mutual funds, insurance, depository, and more
  2. corporate banking including advances, supply chain, merchant banking, syndication, IPO monitoring, etc.

Having known about the history of the lender and what it does, let us now move ahead to understand the banking industry landscape as part of our fundamental analysis of Canara Bank.

Industry Overview

The banking sector in India is well-regulated and adequately capitalized. Reserve Bank of India, the nation’s central bank is responsible for the regulation of the industry and keeps a close watch on the sector.

12 public sector banks, 22 private sector banks, 46 foreign banks, 56 rural banks, 1485 urban cooperative banks, and 96 rural cooperative banks make up India’s banking industry. 

Talking about the growth of the industry, from $1.15 trillion in FY16, the deposits across Indian banks have grown at a CAGR of 9.01% every year to $ 2.10 trillion in FY22 (estimated). In terms of the distribution of assets, public sector banks lead with $1.59 trillion against the private sector’s $0.925 trillion according to IBEF.

However, government banks have been losing market share gradually over the last 20 years to private banks. As per the data from RBI, the market share in loans of public banks has dropped to 59.8% in 2020 from 79.41% in 2000.

The growth of the banking sector is closely tied to GDP growth. Credit fuels economic growth thus resulting in the growth of the nation’s banking sector. India Ratings and Research ( Ind-Ra) expects credit to expand by 10% in FY23, double-digit growth in 8 years. 

Going forward, the rise in the working population, increasing disposable income, formalization of credit, higher internet penetration & accessibility, asset recovery, and GDP growth are expected to propel the banking industry in India.

Canara Bank – Income Growth

Fundamental Analysis of Canara Bank - Financials

Looking at the interest income and other income of the bank, we can observe that over that income across heads rose sharply in the FY2020-21 period. The sharp increase is because of the combined figures of Syndicate Bank and Canara Bank.

Syndicate Bank was merged with Canara Bank with effect from 1 April 2020. This renders the comparison of pre-merger and post-merger results incomparable. 

Nevertheless, we can note that the performance of the bank has improved significantly in the last two years. 

The table below presents the provisions & contingencies and net profit figures for the last 5 years. 

Financial YearProvisions & Contingencies (Rs. Cr.)Net Profit (Rs. Cr.)
202217,5026,158
202117,1702,957
202011,696-1,921
201910,406696
201813,879-3,873

Canara Bank – NPA, NIM, CASA and Other Important Ratios

In the section above we looked at how Canara Bank has turned around with income increasing ahead of provisions. This section is devoted to understanding important ratios and their impact on the lender’s profitability as part of our fundamental analysis of Canara Bank.

The table below highlights the important ratios of Canara Bank over the last five years.

Key Ratios (%)FY18FY19FY20FY21FY22
Gross NPA11.848.838.218.937.51
Net NPA7.485.374.223.822.65
PCR58.0668.1375.8679.6884.17
NIM2.422.632.292.762.82
CASA34.2830.8632.5934.3335.88
Capital Adequacy13.2211.913.6513.1814.9
Return on Assets-0.750.06-0.320.230.48
Return on Equity-16.741.4-8.056.7112.82

From the data above, we can note that the performance of the lender has improved sharply even from two years perspective. 

  1. Gross and net non-performing assets have decreased signaling improved profitability of the company.
  2. PCR or Provisioning Coverage Ratio tells how much funds the management has set aside for losses due to bad debts. The higher ratio in the recent fiscal points to increased prudence of the management.
  3. Net interest margin or NIM has expanded highlighting the growth in profitability for the lender’s operations, i.e. sourcing funds at a lower cost and disbursing at higher interest rates.
  4. Along the same line, its CASA ratio has shown that the bank has accumulated more current and savings account deposits as a percentage of the total deposits. This way it is obtaining funds at a lower cost because it has to pay higher interest on term deposits.
  5. Capital Adequacy has gotten better as well pointing to the more muscular strength of the lender’s capital base to bear losses in any economic catastrophe.

Canara Bank – Future Plans 

So far we have looked at only past years’ financial statements as part of our study of the fundamental analysis of Canara Bank. This section looks at what lies ahead for the company and its investors.

  1. In FY23, the management had planned to Rs. 9,000 crore capital via bonds. By half year, it had raised Rs. 6,000 crores, moving well on its path to meeting its target of capital expansion and increasing its loan book subsequently.
  2. It has upped its digital offerings including revamped mobile banking apps and websites for internet banking to compete with leading banks. Improved focus on these digital initiatives is expected to drive long-term customer satisfaction and attract more customers.

Canara Bank – Key Ratios

We are almost at the end of our fundamental analysis of Canara Bank Let us have a quick look at its key metrics.

CMP₹289Market Cap (Cr.)₹52,500
EPS₹46.60Stock P/E5.65
ROA0.48%ROE12.8%
Face Value₹10.0Book Value₹386
Promoter Holding62.9%Price to Book Value0.76
NIM2.82%Dividend Yield2.23%
Gross NPA7.51%Net NPA2.65%

In Conclusion

In this article, we saw how improved asset quality with earnings growth has contributed to better prospects and returns to the investors of the public lender.

Our fundamental analysis of Canara Bank covered that its overall metrics have improved since the merger. The bank has posted record profits and revamped focused on digital offerings making it stand in line with other leading banks in India. 

Going forward, the management has a huge responsibility to bring asset quality and net interest margin at par with the likes of HDFC Bank, Kotak Mahindra Bank, and more.

In your opinion, will Canara Bank be able to deliver the standards set by private lenders over time? How about you let us know in the comments below?

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