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Canara Bank (BSE: 532483), a public sector bank, is one of the oldest commercial bank in India which has been in operations for over 100 years. The Bank is the third largest public sector bank in terms of assets with a total asset base of over Rs. 2,196.46 billion^[1], while, in terms of net profit and Total Business, the bank slipped to fourth position from third in 2008^[2]. Among the nationalized banks, Canara Bank holds the largest Automated Teller Machine (ATM) network comprising over 2000 ATMs^[3] across India. In the last 5 years, due to increased competition from private banks and foreign banks, the bank has been transforming itself by diversifying its operations from core banking activities to various value added solutions such as Online Share Trading, Internet Purchases Service largely through its subsidiaries and joint ventures. In FY2009, Canara Bank had the low-cost deposits of 30.70%, which is also the highest among public sector banks, driven by sustained efforts, special campaigns, motivational incentives and product innovation^[4]. With current account and savings account (CASA) per branch at Rs.18.12 crore, the Bank continues to be the highest among the peers^[5]. Profit making since inception, the Bank epitomizes a perfect blend of commercial and social banking.^[6]

In a time when most banks have cut back on their lending and are finding it difficult to manage their profitability, Canara Bank with its focus on productive sector like agriculture credit and Micro,Small and Medium Enterprises (MSMEs) lending , saw its total business grow over 24% year-on-year to Rs. 3,251.12 billion in FY2009 driven by 29% growth in advances and over 21%^[7] growth in deposits. In fact the Bank holds one of the most diversified loan portfolios in the Banking Industry with the highest exposure to industrial sector at over 40% followed by 17% MSME, 14.50% agricultural, 14.30% retail lending^[8]. As on 31st March, the bank had 2.78% in net interest margin (NIM), though increased 36bps from FY2008, but it was still low compared to its peers^[9].

Business Overview

Founded as 'Canara Bank Hindu Permanent Fund' in 1906, by late Sri. Ammembal Subba Rao Pai, a philanthropist, this small seed blossomed into a limited company as 'Canara Bank Ltd.' in 1910. The Bank has gone through various phases of its growth trajectory over ten decades of its existence. Growth of Canara Bank was phenomenal, especially after nationalization in the year 1969, attaining the status of a national level player in terms of geographical reach and clientele segments. Eighties was characterized by business diversification for the Bank. With a vision to compete with the global banks, Canara Bank opened its first ever overseas branch in 1983 at London and as on 31st March, 2009, the figure has moved up to 3 International Branches.^[10]

As at March 2009, the Bank had a total of 2,733 branches^[3] spread across all geographical segments. All the branches of Canara Bank are enabled with Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT) transaction facilities, ensuring smooth and swift money transfer across the country.^[11] With convenience at the forefront, the Bank provides a wide array of alternative delivery channels that include over 2,000 ATMs- one of the highest among nationalized banks- covering 705 centers, 1362 branches providing Internet and Mobile Banking (IMB) services and 2062 branches offering 'Anywhere Banking' services. ^[12]

Business and Financial Metrics

Canara Bank Total Revenue and Net Income in the last five years

In FY2009, Canara Bank earned total revenue of Rs. 194.30 billion, a 18.38% rise compared to Rs. 164.14 billion in 2008. This was largely driven by strong growth in its total interest income at 20.55% whereas non-interest income registered a growth of 4.44% due to the fall in dividend income from the various subsidiaries and joint ventures.^[13] The fee income, however, grew at a healthy rate of 18%. The other component of non-interest income - trading income, increased by 55% during the year. ^[14] The total revenue of the Bank has grown at a [CAGR]] of 18.94% between FY2005 to FY2009. In FY2009, it’s net interest margin improved to 2.78% from 2.42% in FY2008 due to increase in yield in advances at 10.79% versus 10.22% in FY2008. However due to large provision on investments, the bank’s Non-Performing Assets (NPAs) increased to 1.02% in FY2009 from 0.84% FY2008. ^[14]

The Total Business (sum of Net advances and total deposits) grew 24.41% to Rs. 3,251.12 billion as at March’09 driven by 28.90% and 21.30% growth in Net advances and deposits respectively^[7]. Growth in deposits mainly came from term deposits which increased by 22.6% y-o-y to Rs1,294 billion and CASA deposits grew by 18.4% y-o-y. The Bank's conscious decision to shed preferential rate deposits by about 24% had a moderating impact on its aggregate deposits, which grew by Rs. 328.21 billion during 2008-09 to reach Rs.1,868.93 billion. Advances growth has been outpaced the deposits growth, which has led the bank to increase its credit – deposit ratio from 62.42% in FY2005 to 73.96% in FY2009^[15]. In order to defend the current financial challenges, the bank has taken few initiatives to expand its credit growth like in order to give a push to automobile sector, the Bank, besides offering competitive interest rate, has entered into tie-up arrangements with four major auto-makers in India viz., Hyundai Motor India Ltd, Swaraj Mazda Ltd, M/s. Maruti Suzuki India and Tata Motors for financing both commercial vehicles and cars including the recently launched Tata-NANO cars.^[12]

Canara Bank Total Revenue and Operating Profit Breakdown by Segment during the year 2008-2009

The Bank has a public holding (other than promoters) of 26.83%, including 11.22% held by foreign institutional investors. As on March 31, 2009, promoter shareholding in the bank was 73.17%.^[17]

Business Segments

Wholesale Banking (37.65% of Revenues, 41.72% of Operating Profit)

The bank generates its highest total income from its wholesale banking segment which constitutes as much as 37.65% as on 31st March 2009 compared to 31.20% in FY2008. Its operating profit grew over 386% y-o-y to Rs. 16.23 billion^[18]. During the year 2008-2009, the bank increased its lending activities to MSME, Industrial and Infrastructures, which has grown over 25% y-o-y each.

Keeping in view the current challenges facing the MSME segments, the Bank has implemented Special Package with reduced interest rates to help these segments access easy credit.

Retail Banking (32.24% of Revenues, 37.78% of Operating Profit)

Advances Portfolio Distribution (as on 31st March, 2009)

The bank took a hit from its Retail Banking business as operating profit fell over 29% y-o-y to Rs. 14.70 billion in FY2009. Percentage of bank's retail banking revenue share in FY2009 dropped to 32.24% from over 41% in FY2008 largely due to its bank’s strict lending, deteriorating housing prices and risk management policy. Total Revenue from retail banking fell 7.30% to Rs. 62.64 billion in FY2009. Retail lending saw a moderate growth of 12% and Rs. 197.98 billion were outstanding as on 31st March 2009.^[18]

As on 31st March, the bank had a total clientele base of 34.80 million constituting 30.50 million deposits accounts and 4.30 million borrower accounts. In order to boost credit offtake in housing and automobile sectors, currently suffering from demand slowdown, the Bank has announced a competitive special package with reduced rates of interest and other freebies.^[12]

Treasury Income (24.33% of Revenues, 20.50% of Operating Profit)

Treasury income increased by 10.75% from Rs. 42.67 billion in FY2008 to Rs. 47.25 billion in FY2009 and constituting 26% of the Bank’s total revenue. Operating income rose by 157% y-o-y to Rs. 7.97 billion in FY2009due to a 55% increase in trading income.^[18]

Key Trends and Forces

Falling interest to affect Net Interest Margin adversly

Interest rates have been volatile for the past one-and half year. In the first half of 2008 India was experiencing runaway inflation, which touched a new 13-year high of 11% on June 07, 2008^[19] compared to 3.80% in January'08 and to control it, the RBI had been increasing the Cash Reserve Ratio (CRR), repo rate (the rate at which banks borrow rupees from RBI) and the reverse repo rate (the rate at which Reserve Bank of India (RBI) borrows money from banks). But with the global economy slowing in the second half it started cutting interest rates to boost the economy. Between mid-October 2008 to May 2009, the RBI has cut its short-term lending rate by 425 basis points in six steps.^[20] With the steep fall in interest rates, the NIMs of the Indian banks have been impacted adversely due to the conscious approach in lending coupled with the falling interest rate on floating rate loan . Canara Bank on its part managed to maintain its cost of funds at 6.29% in FY2009 driven by low cost deposits and this helped in improving its NIM to 2.78% in FY2009.^[15]

Low-cost, deposits key to banks’ profitability

Demand or current account and savings account (CASA) are the key to banks’ profitability, particularly at a time when they cannot raise their lending rates due to intense competition, or a conservative lending approach. Term deposits that have tenures ranging from one week to a few years are an expensive liability and interest paid on such deposits can be as high as 10-11%. compared to cost of savings accounts of less than 3% ^[21] So, the best way to keep the net interest margin (NIM) intact is to bring down the cost of deposits by expanding CASA . Despite their countrywide branch network, not too many public sector banks have a substantial CASA in their portfolio as semi-urban and rural branches are not a huge source of low-cost deposits. In a period from March'08 and September'08, Most public sector banks witnessed a fall in their CASA deposits. It fell by 3% for the largest lender, State Bank of India (SBI) and even for Bank of Baroda, Bank of India, Canara Bank, and Oriental Bank of Commerce. However, Canara Bank on its part has managed to do well with its CASA deposits remaining at 30.70% as on 31st March 2009, fell just 30bps compared to FY2008. ^[22]

Economic slowdown impacting the asset quality of banks

The global financial turmoil in 2008 has resulted in asset quality challenges for the banking industry and Banks have seen their asset quality deteriorate, with rising defaults in the corporate, as well as the retail sector. Indian banks witnessed a sharp jump in their gross NPAs for the first time in six years in FY'08^[23], compelling many of them to enhance their existing risk assessment tools. According to Reserve Bank of India, Gross NPAs of commercial banks escalated by Rs 61.36 billion in FY'08. Rating agency, Fitch believes that this could severely impact the Non-Performing Loan (NPL) ratios of Indian banks. The impact is expected to be slow but steady with NPLs rising over the next few quarters. It seems Canara Bank would have a tough time managing its assets well.^[24] Both Gross NPAs and Net NPAs increased in FY2009, to 1.56% and 1.09% from 1.18% and 0.84% respectively in FY2008. However, the fact that the bank has restructured a large portfolio of Rs. 20.66 billion in FY2009, means there is pressure on its asset quality and the NPAs could rise further.^[15]

Competition

• State Bank of India (SBI-BY)  : State Bank of India (BSE:SBI), a public sector bank, is the largest bank in India.^[25]. Besides personal and corporate banking, SBI is also involved in NRI (Non Resident Indian) services through its network in India and overseas. As of May 2008, the bank had 21 subsidiaries and 10,186 branches.^[26] The Bank has posted a Net Profit of Rs. 6729 Crores for 2007-08 as compared to Rs.4541Crores in 2006-07, registering a growth of 48.18%.^[26]

• Punjab National Bank : Punjab National Bank with 4497 offices is the largest nationalized bank currently serving 3.5 Crores customers^[27].Punjab National Bank has been ranked 38th amongst top 500 companies by The Economic Times. PNB has earned 9th position among top 50 trusted brands in India.The bank posted a gross profit of Rs. 4006 Crores for 2007-08 as compared to Rs 3231 Crores in 2006-07, registering a growth of 24.6%. ^[28]

• Bank of India (BANKINDIA.EQ-IN): Bank of India, established on 7 September 1906 is a bank with headquarters in Mumbai. Government-owned since nationalization in 1969, It is one of India's leading banks, with about 2,884 branches including 27 branches outside IndiaThe bank posted a gross profit of Rs. 3701 Crores for 2007-08 as compared to Rs 2394 Crores in 2006-07, registering a growth of 54.59%.^[29]

• HDFC Bank : The Housing Development Finance Corporation(HDFC) bank Limited (HDFCBANK.EQ-IN), the second largest private sector bank in India by net profit,^[30] generated revenues of over Rs m 5228 Crores in 2007.^[31]. Headquartered in Mumbai the bank is one of the first private banks to be set up in India. With a network reach of 1412 branches spread over 528 cities across India and having over 2890 ATMs across these cities,^[32]the bank is the largest private sector bank in terms of branch network in India leaving behind ICICI bank.^[33]

As on 31st March 2008, total advances was estimated at Rs. 21,815.50 billions. Canara Bank with total advances of Rs. 1,073.30 billion had a market share of 4.92%.

Market Share by Total Advances as on 31st March, 2008.^[34]

All figures are as on 31st March, 2008 as per the respective Company's annual report.

References

1. ↑ FY 2008-09 - Annual Results – Investor Presentation, Slide 9
2. ↑ Economic Times - Bank of Baroda pips Canara Bank to become third largest public sector bank
3. ↑ ^{3.0 3.1} FY 2008-09 - Annual Results – Investor Presentation, Slide 2
4. ↑ The Hindu Businessline - High interest income lifts Canara Bank Q4 net by 55%
5. ↑ FY 2008-09 - Annual Results – Investor Presentation, Slide 29
6. ↑ ruppetimes
7. ↑ ^{7.0 7.1} FY 2008-09 - Annual Results – Investor Presentation, Slide 7
8. ↑ FY 2008-09 - Annual Results – Investor Presentation, Slide 30
9. ↑ FY 2008-09 - Annual Results – Investor Presentation, Slide 13
10. ↑ Canara Bank website - Company profile
11. ↑ I Loveindia - Canara Bank Profile
12. ↑ ^{12.0 12.1 12.2} Press release for quarter and year ended March, 2009, Page 3
13. ↑ FY 2008-09 - Annual Results – Investor Presentation, Slide 10
14. ↑ ^{14.0 14.1} The Hindu Businessline
15. ↑ ^{15.0 15.1 15.2} Press release for quarter and year ended March, 2009, Page 1
16. ↑ FY 2008-09 - Annual Results – Investor Presentation, Slide 12
17. ↑ Canara Bank website - Shareholding Pattern as on 31st March 2009
18. ↑ ^{18.0 18.1 18.2} FY 2008-09 - Press release for quarter and year ended March, 2009, Page 3
19. ↑ Economic Times - At 11%, inflation hits 13-year high
20. ↑ Economic Times - RBI cuts interest rates by 25 bps
21. ↑ Livemint - Low-cost, deposits key to banks’ profitability
22. ↑ Rupee Times
23. ↑ Blonnet.com - NPA management major challenge for banks in 2009
24. ↑ Ayaanbayaan - fitch-asset-quality-downturn-in-2009-manageable-for-indian-banks
25. ↑ SBI Website
26. ↑ ^{26.0 26.1} Page 9, SBI Annual Report 2007-08
27. ↑ Finance IndiaMart PNB
28. ↑ Rediff Money PNB
29. ↑ Rediff Money, Bank of India
30. ↑ Insight 2nd Jan 2009.pdf Market Insight, 2nd Jan 2009, page 4
31. ↑ Page 2, Annual report 2007-2008
32. ↑ HDFC Bank website
33. ↑ Livemint HDFC Bank pips ICICI in terms of branch network
34. ↑ Profile of Banks Reserve Bank of India - A Profile of Banks : 2007-2008