Canara Bank: Bleak outlook pressures stock despite cheap valuations

Shares of Canara Bank gave up gains in line with the trend in the broader markets a day after the bank reported its loan book grew at a slow pace of 10% compared with the industry average of 16%. This, in addition to an 8% decline in profit overshadowed the slight improvement in asset quality and stability of margins since the December 2011 quarter.

Both, gross and net NPA (non performing asset) ratios improved over December 2011 level at 1.81% and 1.49% respectively. But this was not enough to significantly improve the outlook for the Bangalore-based lender over the coming quarters given its high exposure to the infrastructure.

Moreover, with cost of deposits expected to remain under pressure, there is little scope for improvement in its net interest margin. Its net interest margin, or the difference between the yield on advances and the cost of funds, has remained stable at 2.5% since December 2011. It was 3.9% in March 2011.

The cost of deposits, which rose to 7.35% from 5.80% last year, was primarily responsible for the decline in profit.

HSBC has downgraded its rating on the stock while Citi remains neural. This is despite the fact that the stock is currently trading below its 3-year historical valuations. At Rs 415, the stock trades at a price to earnings multiple of 5.65 and a price to book value multiple of 0.81 times, a significant discount to its peers.