Canara Bank (BSE: 532483), a public sector bank, is one of the oldest commercial banks in India. 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, while in terms of net profit and total business, the bank has slipped to fourth from third in 2008. Among the nationalized banks, Canara Bank holds the largest Automated Teller Machine (ATM) network comprising over 2000 ATMs 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 and an Internet Purchases Service largely through its subsidiaries and joint ventures. With current account and savings account (CASA) per branch at Rs. 18.12 crore, the Bank continues to be the highest among the peers.
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% 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. As of March 2009, the bank had 2.78% in net interest margin (NIM), though increased 36bps from FY2008, but it was still low compared to its peers.
As of March 2009, Canara Bank had a total of 2,733 branches 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. 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. 
First Quarter 2010 Results (April-June 2010)
During the first quarter, Canara Bank reported net profit of Rs. 1,013 crore compared to Rs.555 crore in the year-ago period, registering 83 percent year-on-year growth. The bank’s total income increased 17 percent year-over-year to Rs. 5,895 crore from Rs.5,032 crore owing to profit from treasury operations jumping to Rs. 224 crore from Rs.28 crore a year ago and non-interest income increasing to Rs.734 crore from Rs.474 crore year ago.
Operating profit also increased 61 percent to Rs. 1,483 crore during the quarter from Rs. 921 crore a year ago. Return on assets increased to 1.55 percent from 1.02 percent year-over-year, while net interest margin (NIM) improved to 3.01 percent from 2.7 percent year-over-year.
The bank’s capital adequacy ratio (CAR), however, declined to 12.44 percent from 13.59 percent a year ago. Cost of deposits also declined to 5.69 percent in Q1 from 6.48 percent a year ago, and yield on advances fell to 9.35 percent from 10.05 percent.
Total business for the quarter totaled Rs. 412,649 crore in Q1 from Rs.334,325 crore a year ago, with deposits increasing 23.3 percent year-over-year to Rs. 238,855 crore from Rs. 193,657 crore. Advances increased 23.6 percent Rs.173,794 crore. The bank has reduced its gross and net non-performing assets (NPAs) to 1.46 percent and one percent in Q1 from 1.74 percent and 1.29 percent year ago, respectively.
|Metric (in Billions INR)||2005||2006||2007||2008||2009|
|Total Interest Income||75.72||87.11||113.64||142.01||171.19|
|Non - Interest Income||15.44||13.77||15.12||22.13||23.11|
|Return on Assets||0.92%||1.01%||0.98%||0.92%||1.06%|
|Credit deposit Ratio||59%||65%||69%||70%||74%|
Fiscal Year 2009 Results
In FY2009, Canara Bank earned total revenue of Rs. 194.30 billion, an 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 growth of 4.44% due to the fall in dividend income from the various subsidiaries and joint ventures. 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.  The total revenue of the Bank has grown at a [CAGR]] of 18.94% between FY2005 to FY2009.
In FY2009, the bank'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. 
The Total Business (sum of Net advances and total deposits) grew 24.41% to Rs. 3,251.12 billion as of March 2009, driven by 28.90% and 21.30% growth in net advances and deposits respectively. Growth in deposits mainly came from term deposits which increased by 22.6% year-over-year to Rs. 1,294 billion and CASA deposits grew by 18.4% year-over-year. 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 outpaced deposits growth, which has led the bank to increase its credit-deposit ratio from 62.42% in FY2005 to 73.96% in FY2009. In order to defend the current financial challenges, the bank has taken a few initiatives to expand its credit growth. For example, in order to give a push to the automobile sector, the Bank, besides offering competitive interest rates, has entered into tie-up arrangements with four major auto-makers in India: Hyundai Motor India Ltd, Swaraj Mazda Ltd, M/s. Maruti Suzuki India and Tata Motors.
In FY2009, the company posted a consolidated net profit of Rs. 20.72 billion, up from Rs. 15.65 billion in FY2008 fueled by improvement in operational cost efficiency and lower loan provisioning. Its net profit has grown at a CAGR of 17% in the last five years. During 2008-2009, the bank has managed to reduce its cost to income ratio substantially from 48.54% to 43.61%.
The bank generates its highest total income from its wholesale banking segment which constitutes as much as 37.65% as of 31st March 2009 compared to 31.20% in FY2008. Its operating profit grew over 386% year-over-year to Rs. 16.23 billion. During the year 2008-2009, the bank increased its lending activities to MSME, Industrial and Infrastructures, which has grown over 25% year-over-year each.
Keeping in view of the current challenges facing the MSME segments, the bank has implemented a Special Package with reduced interest rates to help these segments access easy credit.
The bank took a hit from its Retail Banking business as operating profit fell over 29% year-over-year 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 of 31st March 2009.
As of 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.
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% year-over-year to Rs. 7.97 billion in FY2009due to a 55% increase in trading income.
Interest rates have been volatile for the past year. In the first half of 2008 India was experiencing runaway inflation, which touched a new 13-year high of 11% in June 2008 compared to 3.80% in January 2008 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). With the global economy slowing in the second half, the RBI 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. 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 loans. Canara Bank 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.
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%  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 of 31st March 2009, fell just 30bps compared to FY2008. 
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, 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. 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.
|Metrics/Company (figures in Billions INR)||Axis Bank||ICICI Bank||HDFC Bank||State Bank of India||Punjab National Bank||Bank of India||Bank of Baroda||Indian Bank||Canara Bank|
|Net Revenue (net of interest exp.)||43.8||161.83||75.11||264.2||75.32||85.51||59.62||30.60||58.46|
|Net Interest Income||25.85||73.04||52.3||170.21||55.34||54.99||39.11||20.54||35.38|
|Revenue Growth from 2007||71.50%||45.18%||50.70%||12.43%||8.49%||70.92%||20.21%||19.08%||5.50%|
|Net Profit Margin||24.45%||25.69%||21.17%||25.47%||20.46%||35.17%||24.07%||32.98%||26.77%|
|Total Operating Income||22.26||72.43||37.65||138.11||40.06||54.57||30.27||16.59||29.59|
|Other Key Industry Metrics|
|capital Adequacy Ratio||13.73%||14.92%||13.60%||13.47%||12.96%||12.95%||12.91%||12.74%||13.25%|
|Return on Assets||1.24%||1.10%||1.32%||1.01%||1.15%||1.25%||0.89%||1.64%||0.92%|