Canara Bank Q1 FY2026 Concall Summary

Key Takeaways

• Credit growth beat, NIM fell on rate cuts: Advances grew ~12% YoY, above the 10-11% guidance, but NIM dropped 17 bps to 2.55% as repo rate cuts passed through to the RLR-linked book before deposit costs could adjust.
• Deposit repricing benefit is loaded into Q2: The bank cut term deposit rates by 50-60 bps only on June 8-9, so the full cost-of-funds benefit was absent from Q1. Management expects visible improvement from Q2, with 50% of bulk deposits repricing by September 30.
• Asset quality conviction is unusually high: Two large SMA2 accounts (₹5,000 cr combined) have oscillated for six quarters, but management is "100%" certain they will never slip to NPA, backed by ₹1,200 cr of additional provisioning.
• One-off treasury boost masks core fee momentum: Q1 other income included a non-recurring ~₹500 cr OMO gain; the bank plans to bridge the gap in Q2 via PSLC sales, where yields have nearly doubled to ~3%.
• What to watch next quarter: Whether the deposit repricing benefit lifts NIM back toward 2.70%, whether the two large SMA2 accounts stay standard, and whether the promised Q2 recovery surge from OTS repayments materializes.

Margin Trajectory & Rate Sensitivity

• The Q1 NIM mechanics: Yield on advances fell 36 bps because 45% of the loan book is RLR-linked and absorbed 100 bps of repo cuts (25 bps in Feb, 25 bps in April, 50 bps from June). Cost of deposits stayed at 5.74% through June because deposit rate cuts were enacted only on June 8-9, after the quarter had effectively closed.
• The Q2 tailwind: Term deposit rates were cut by 50-60 bps, and 50% of the ₹4 lakh cr bulk deposit book will reprice by September 30 (25% on 3-month tenor already done, 25% on 6-month repricing this quarter). Fresh bulk deposits are being taken at 6-6.10% vs the previous average of 7.6-7.7%. The remaining 50% on one-year tenor will take longer to reprice.
• MCLR transmission lag: The 40 bps MCLR reduction (9.10% to 8.75%) will impact yield on advances with a lag of up to one year, as one-year MCLR resets only when individual accounts complete their annual reset cycle. Management did not quantify how much of the reduction is already reflected vs pending.
• The guidance slide is effectively withdrawn: Management had guided NIM of 2.70-2.80% for FY26 assuming only two 25 bps rate cuts. With the 50 bps cut that occurred and market expectations of two more cuts to 2.25%, management stated maintaining that range "may be difficult."
• The floor, not the ceiling: Management expects NIM may not go below 2.5% in Q2, and if no further rate cuts occur, NIM may gradually improve in Q3 and Q4. The 17 bps Q1 decline is not expected to repeat in Q2; the reduction will be less steep.

Satyanarayana Raju: "Overall I feel that, our NIM may not go below 2.5 percent but we will be able to maintain that around the 2.5 for the next…. this current quarter but we see that the slowly, that if no further rate cuts are there, subject to that, if we may see slowly, that 2.2…. this NIMS may gradually improve in the third and fourth quarter"

Asset Quality & Provisioning

• SMA2 conviction: Two large accounts, a ₹2,000 cr real estate exposure in Bengaluru and a ₹3,000 cr irrigation project with a state government guarantee, have been oscillating within SMA categories for six quarters. Management is "100%" certain they will never slip to NPA, citing six quarters of observed behavior, and has taken ₹1,200 cr of additional provisioning as a safety measure.
• Credit cost guidance held conservatively: Management maintains its 90 bps credit cost guidance despite net NPA already at the 0.63% target, declining to revise it upward. The stated logic: "we give guidance conservatively and we will excel." Net NPA and gross NPA targets for March 2026 may be crossed by September, or December at the latest.
• Restructured book shrinking: The restructured book (RF1, RF2) has fallen to ₹11,000 cr total, of which ₹7,000 cr is standard and ₹4,000 cr is NPA.
• NARCL pipeline: Eight new accounts worth around ₹4,000 cr have been identified for NARCL and are at different stages of follow-up.
• Project finance provisioning: No additional provisioning was required this quarter; RBI guidelines apply only to projects reaching financial closure after October 1, 2025, while existing projects continue with current provisioning norms.
• ECL readiness: The bank is prepared for ECL implementation but the timeline depends on RBI. Even if the entire provisioning impact is absorbed in the first year, CRAR would remain much above 14%.

Satyanarayana Raju: "100 percent, there is no chance of slipping to NPA sir. It is not even 99 percent. I'm telling you 100%. By observing the 6 quarters I'm telling you this."

Other Income: The Q1 Boost & Q2 Bridge

• OMO windfall: Q1 treasury income was boosted by ~₹500 cr from OMO support, which is non-recurring. The additional ~₹1,000 cr in other income vs the prior year will be substantially lower next quarter.
• PSLC as the bridge: Management plans to compensate for lower treasury income via PSLC sales, having held back excess priority sector cushion from Q1. PSLC volumes fell ~30-40% but were compensated by higher yields: earlier 1.6-1.7%, now ~3%. The bank still has excess in all three priority sector parameters, so PSLC income will continue "not only this year, the next year or the next year also."
• Gold loan PSLC clarity: Gold loans below ₹2 lakh were previously thought to be reclassified as non-agriculture, so the bank kept those out of the priority sector bucket and sold only remaining PSL. RBI has now clarified there is no bar on classifying gold as collateral for agriculture, which expands the saleable PSLC pool. The bank sold ₹40,000 cr of PSLC this quarter vs ₹85,000 cr last year but earned higher commission of ₹1,200 cr due to heavy market demand.
• Recovery surge expected in Q2: Four to five large OTS proposals were sanctioned last quarter with 90-120 day payment timelines falling due this quarter. Management expects Q2 recovery from return of accounts to be "much better" than Q1.

Satyanarayana Raju: "what I want to communicate to you that it is not PSLC income is stopped for this bank, it will continue not only this year, the next year or the next year also."

Loan Book Composition & Growth

• RAM shift achieved: RAM credit grew ~15% vs the corporate book at ~10%, achieving the three-year target of 58% RAM / 42% corporate, up from 54/46 three years ago. Management expects RAM to continue around 15% growth, with MSME targeted beyond 20%.
• Corporate growth outlook: Overall credit growth guidance is 10-11%, but management says minimum 12% is achievable. Corporate may grow at 10%, while RAM drives the outperformance.
• NBFC book contraction: The NBFC book fell 3% QoQ because the bank chose not to renew a large ~₹8,500 cr exposure rather than compromise on pricing. The bank remains cautious on NBFC lending due to the sector's higher cost of funds and low CASA profile.
• Agriculture thrust: The government is keen on higher agriculture growth, and management is giving thrust to this sector alongside the MSME push.

Deposits, CASA & Cost of Funds

• CASA ratio fell below 30%: The decline was driven primarily by institutional deposits (₹20,000-25,000 cr from central PSU campuses) that are withdrawn in April-May after being parked in March. Individual savings deposits are growing steadily at 6%+, but total business is growing at 12%+, so CASA growth cannot keep pace in percentage terms. Absolute CASA is growing, just not fast enough to maintain the ratio.
• CASA recovery path: Management expects CASA to return above 30% by year-end and is targeting 32% eventually. The thesis: as term deposit rates decline, possibly below 6% or near 5% with further rate cuts, customers may retain funds in savings accounts rather than converting to term deposits.
• Savings deposit rate on hold: When asked if savings deposit rates could see another cut, management stated "at this moment, there is no such proposal on hands."
• Cost of funds inflection: The benefit of deposit rate cuts (50-60 bps on term deposits from June 8-9) will be visible from Q2 onwards.

Digital & Operational Transformation

• Digital lending platform: A comprehensive digital lending platform has been launched with 70-75% of products already created. The target is to convert the entire RAM portfolio to the digital platform by March 2026. New loans are already being onboarded; existing loans for renewals are also being converted.
• Cyber security investment: A comprehensive cyber security platform is being created with almost ₹70 cr invested; it is expected to become operational in about one month.
• Credit card platform rebuild: The entire credit card platform is being refaced, with the purchase order almost at the verge of issuance. Once the new platform is implemented, the bank will go aggressively on canvassing credit cards.
• IT specialist hiring: 120 specialist IT officers have been recruited through IBPS and deployed; 60 specialists at the project leadership cadre have been recruited on contract with market-demand packages and are expected to report after two months (3-month notice period).
• OpEx investment sustained: Q1 did not show the typical QoQ decline in operating expenses, attributed to ongoing technology investments of ~₹1,000 cr annually. Management expects OpEx growth of 6-8% annually. Cost-to-income ratio improved from 47.55% to 46.77%.
• Subsidiary push: The bank is investing capital to strengthen Canara Bank Securities Limited, with a General Manager posted there, aiming to serve existing customers dealing in equities and mutual funds, which is expected to benefit CASA.

Satyanarayana Raju: "That will change the face of the credit side portfolios in the quality as well as in the TAT and all those things. There will be a sea change in that so that we can easily compete with the private peers in the credit side also."

Guidance & Commitments

Key Metrics