India Ratings & Research (Ind-Ra) has affirmed Canara Bank's long-term issuer rating at 'AAA' with a stable outlook.
The rating is based on Ind-Ra's assessment of strong support from Canara's principal shareholder-the government of India (69% ownership). This is because of the bank's systemic importance to the Indian banking system with over 4% share in system deposits and system assets. The government support on a going concern basis has been forthcoming in the form of equity injections. The stable outlook reflects Ind-Ra's view that no change in support stance to the bank is likely over near to medium term.
Canara's standalone financial profile, however, has been weakening over the last few years on account of its increasing reliance on high-cost wholesale funding. Thus, its net interest margins are being compressed. A weak fees income profile and above-average operating costs are also putting pressure on profitability. Consequently, return on average assets dropped to 0.55% in 3QFY14 from 0.77% at FYE13.
Asset quality has seen steady deterioration, although it is at par with similar or lower rated government banks. Gross NPL ratio increased to 2.79% at 3QFYE14 from 2.57% at FYE13 on account of steady deterioration in industry exposure, because of continuing macroeconomic stress. In addition, restructured assets were 7.46% of advances at 3QFY14. Canara is trying to reduce portfolio concentration and increasing share of retail and SME lending in total advances. Furthermore, it is continuing to focus at recovery/ upgradation across secjetors. The bank has reduced gross NPAs in the current year by INR60bn through cash recovery and account upgradation.
The current capital base appears adequate for Canara to sustain its loan growth in FY15, if it grows in line with system average. Basel III common equity Tier 1 (CET1) ratio was 7.13% at 3QFYE14. According to Ind-Ra, Canara will need to raise CET1 of over Rs 145 billion during FY16-FY19 to achieve a CET1 ratio of 9.5% at the end of the migration period.
Funding remains weak with low-cost current and savings deposits (CASA) at only 23% of total deposits at 3QFYE14, which is much lower than similar rated banks. The bank is restricting wholesale deposits mobilisation to improve CASA. Also, it expanded its network by 829 branches in 9MFY14 to increase retail funding and announced a number of staff incentive schemes. Canara expects to improve CASA to over 25% in the medium term, which appears achievable. The improved funding profile should help Canara improve the margins and profitability in the medium term.
Shares of the bank declined Rs 1.05, or 0.37%, to settle at Rs 279.35. The total volume of shares traded was 245,226 at the BSE (3Tuesday).
