Canara Bank Q1 FY2023 Concall Summary

Key Takeaways

• Profit crosses a benchmark, with more to come: Net profit grew 71% YoY to over ₹2,000 crores, and management is confident it can sustain this level going forward.
• Credit growth was strategically front-loaded: A typically slow Q1 was used to attract clients and push advances growth to 14.4%, well above the 8% guidance, a move designed to benefit ratios in the coming three quarters.
• Asset quality is improving, but the restructured book is still bleeding: GNPA and Net NPA fell significantly YoY, yet slippages of ₹3,600 crores included an anticipated 10-15% hit from the restructured pool, with management expecting cumulative slippages there to eventually reach 18-19%.
• The margin story is a Q2 story: Advances yield was suppressed at 7.03% because only 40 bps of the repo hike was passed on in Q1; the remaining 50 bps was loaded on 7th July, and with no further deposit rate hikes foreseen in the coming one to two months, yields are set to improve.
• What to watch next quarter: Whether the full 50 bps repo pass-on lifts advances yield past the 7.10% target, the pace of recovery from the three fully provided investment accounts, and if CASA growth rebounds as government institutional flows resume.

Strategic Front-Loading of Credit Growth

• Q1 push to capture clients: Management deliberately pursued credit growth in a seasonally slow quarter to lock in clients, expecting the higher base to improve ratios in subsequent quarters. Growth was balanced across Retail (11.56%), Agri (18%), MSME (13%), and Corporate (14%).
• Guidance treated as a floor: The 15% advances growth far exceeded the 8% minimum benchmark; management stated guidance is a floor and growth can go higher depending on proposals and the economy, with Q2 expected to be even better.
• Sectoral spread is wide, not concentrated: Active sectors include infrastructure (especially HAM), NBFC finance (AAA/AA only), iron and steel, selective real estate housing, engineering, construction, and chemicals, so a shock to any one sector can be absorbed by others.
• Overseas book scaled rapidly: The overseas portfolio grew 52% YoY to ₹35,000 crores, with 90% in India-linked AAA/AA rated companies; management has set a direction to reach at least ₹1 trillion in overseas gross advances.

Prabhakar: "in Q1 generally the credit growth will not be so impressive. So, what we thought is, in Q1, we have to take the opportunity to attract all the clients and to show a decent credit growth so that in the coming 3 quarters, the credit growth which is significant in Q1 will give many advantages to the ratios in the coming quarters."

Margin Mechanics: The Delayed Repo Pass-On

• A deliberate breathing window for borrowers: Only 40 bps of the 90 bps repo hike was passed on in Q1; the remaining 50 bps was loaded on 7th July to avoid burdening customers with the full increase in a single, sensitive quarter. This suppressed Q1 advances yield to 7.03%.
• Yield uplift is now locked in: With the full 50 bps now effective and no further deposit rate increases foreseen in the coming month, management expects advances yield to rise in Q2 and wants to cross a 7.10% minimum.
• Deposit costs already reset: Deposit rates were increased during Q1 to retain customers amid inflation; a further call will be taken in September depending on whether inflation falls below 6%, but for now the cost side is stable.
• Credit mix also a drag on yield: ₹40,000 crores of advances were given to AAA-rated companies in Q1, contributing to a lower-yielding mix, a structural headwind alongside the tactical rate delay.

Prabhakar: "We don't want in June quarter itself to load our customers with 90 basis points additional interest... June quarter we thought that it is very sensitive quarter where we have to give some breathing time to our customers, hence we have loaded that 50 basis points on 7th of July."

Asset Quality: Clean-Up Progress and Residual Drag

• Headline improvement is real: GNPA and Net NPA reduced significantly YoY, and the Risk Weighted Assets ratio improved to 69% from a prior range of 74-79%, which management called possibly one of the best in the banking sector, driven by a portfolio with 78% A-and-above rated accounts.
• Restructured book slippages are tracking to plan: Cumulative slippages from the restructured pool reached 10-11% (₹1,800 crores), with management expecting an eventual 18-19% cumulative slippage rate. Collection efficiency on restructured accounts is 90-91%.
• Future Group and MSME drove Q1 slippages: Total slippages of ₹3,600 crores included Future Group exposure of ~₹1,240 crores (now fully provided) and ₹1,500 crores from MSME, which was ₹200-300 crores above the typical quarterly run-rate.
• Full-year slippage ceiling maintained: Management reiterated a maximum ₹15,000 crores in full-year slippages, with recoveries expected to exceed slippages, and the remaining restructured book slippage of 8-9% already factored into this guidance.
• Three nonperforming investments fully provided: Provisions of ₹1,535 crores were made on investments in Future Group (~₹640 cr), a telecom account (~₹640 cr), and a sugar industry account (~₹245 cr); management sees good scope for future recoveries from these accounts.

Prabhakar: "this 69% of Risk Weighted Assets maybe one of the best in the banking sector."

Profitability Levers Beyond the Core

• Non-interest income jumped 25% YoY: Fee-based income grew 18% to ₹1,577 crores per quarter, boosted significantly by processing charges from HAM project sanctions worth ₹50,000 crores.
• PSLC income is a recurring windfall: The bank earned ~₹840 crores in Q1 from PSLC, compared to over ₹900 crores in all of FY22, and management described it as an every-year phenomenon as long as RBI does not change the criteria, with more profit expected in Q2.
• Provision reversals added a tailwind: ₹650 crores of provision reversals were booked in P&L, comprising reversals on Future Group standard asset provisions, FITL, delayed RP, and a Bajaj Hindustan S4A provision, all triggered by accounts slipping to NPA or resolution.
• Treasury profit absorbed MTM depreciation: Trading profit of ₹889 crores included depreciation of ~₹360 crores, meaning gross profit was higher; management sees only ₹100-150 crores of additional MTM losses if the 10-year yield moves to 7.75%, and has sufficient profit to absorb it.

Prabhakar: "And this is every year phenomena, as long as RBI doesn't change the criteria."

Gold Loans and the Deposit Franchise

• Gold loan portfolio crossed ₹1 lakh crores: The portfolio grew by ₹20,000 crores YoY from ~₹80,000 crores, a milestone management attributed to hard work, customer confidence, and involvement of all staff members, with a commitment to continue both growth and consolidation.
• CASA was seasonally weak, recovery expected: Q1 is challenging for CASA because government institutional deposits flow heavily in March and only partially resume in Q1; management expects minimum double-digit CASA growth from Q2 onwards as these flows return.
• Deposit pricing philosophy balances all stakeholders: Management articulated a philosophy of taking care of depositors with a long-term view while not charging borrowers excessively, aiming to make a decent profit in between, with deposit rates already increased in Q1 to retain customers.

Prabhakar: "Sir, gold loan let me tell you the secret, it is hard work and confidence of the customer. Only these two things will help us to increase the figure."

Subsidiary Oversight: Can Fin Homes Clean-Up

• Full branch inspection completed: All 200 branches of Can Fin Homes were inspected, with process deficiencies and irregularities identified and largely addressed; additional frauds of ₹2.3 crores were found in ~23 accounts and 100% provided.
• Management control tightened: Four top executives from Canara Bank were deputed to Can Fin Homes, including one executive controlling and monitoring inspection, and staff strength was increased; management now considers it one of the best subsidiaries after screening and addressing loopholes.

Prabhakar: "We in Canara Bank we believe in one thing that is compliance first, business next. We want to have Canara Bank as well as all my subsidiaries 100% compliant of the regulations and 0% tolerance as far as this is concerned."

Guidance & Commitments

Key Metrics