Saturday, July 6, 2013

Why Canara Bank Faces an Uphill Task, Despite Rate Cut

Canara Bank's recent base rate cut from 10.25% to 9.95%, is a 0.30% cut in the lending rate for all loans. The move came within just hours of India's Finance Minister P Chidambaram urging PSU banks like Canara to not withhold RBI's rate-cut benefits from customers, but to pass on the same for better credit offtake. Though Canara Bank CMD, RK Dubey, has clarified recently that the move is a business decision, the timing obviously points to the fact that he was heeding FM's call. Dubey explains the "business decision" by stating that Canara's cost of funds have been brought down by 50-80 bps during the just concluded first quarter, due to a significant shedding of high-cost deposits during the past 5 months, which was a strategy he personally directed. But then the question is why couldn't the rate cut come earlier as RBI had cut rates in Jamuary and May. But Chairman Dubey is also right when he claims it is a business decision, but for another reason. During Q4, Canara Bank had one of the poorest credit growth rates in the industry at just 4%, even while its credit-to-deposit ratio is also one of the lowest at 65%.

While the current move is good for Canara's loan customers, the bank has also cut its fixed-deposit rate by up to 0.50% in some maturities, which will be adverse for deposit customers.

The bank needs to strengthen its operational rigour as it has been one of the PSU banks alleged to have done fraudulent KYC norms and money-laundering as per the Cobrapost expose. Alleged scamsters acrtress Leena Maria Paul and her partner Chandrashekhar had also cheated Canara Bank Chennai of Rs. 19 crore.

Canara Bank stock has also fallen by more than 36% from its 52-Week High of Rs. 550 recorded in January to Rs. 350 now.

That Canara Bank had a difficult Q4 as well as FY’13, need not be underscored. The Bangalore headquartered lender’s quarterly bottomline that hit a rock bottom during this past fiscal - precisely in Q2 - didn’t recover much in Q3, as well as now in Q4. Both sequential quarters showed YoY dips in net profit.

Like a few of its public sector peers, Canara Bank is bogged down by serious asset quality concerns. But while many PSU banks are at least showing a glimmer of hope beneath the headline numbers, Canara’s numbers and other operational stats show that nothing short of a miracle should happen in the economy as well as inside the bank, for it to climb back to a growth trajectory.

But before delving into it, here is a quick look at the headline numbers at this mid-sized PSB. Canara Bank's fourth quarter net profit fell nearly 13% at Rs 725 crore, on a YoY basis. Net Interest Income (NII) grew just 2.5% at Rs 2,091. Loans grew at what is perhaps the slowest pace among all banks in Q4, at just 4%.

Asset quality concerns were obvious with Gross Non Performing Assets (GNPA) ratio spiking to 2.57% from 1.73% percent a year back. Provisions and contingencies surged by nearly 63% to touch Rs. 752 crore from Rs 462 crore in the year-ago period. What was more alarming was that despite provisions surging, Net NPA ratio also went up sharply to 2.18% from 1.46%.

Though Canara Bank is in no way alone in posting such bad numbers this quarter, the performance should be noted for some extremes. Firstly, the extremely poor credit growth at 4%, as against RBI’s estimate which is nearly four times higher. Many of the poorly performing PSU banks in this quarter, on a bottomline basis, are however noted for keeping pace with RBI estimates for credit growth or going even higher in Q4.

This situation is particularly harmful to Canara Bank, as already it has been suffering from one of the lowest credit/deposit ratios in the industry. Counting in also the dismal performance on this front in Q4, the bank’s C/D ratio stands at just 65%. This dimension needs to be deeply introspected by Canbank, as upping the C/D ratio is one of the few fundamental ways in which any bank‘s profitability can be improved.

It has not been long since Chairman & Managing Director, RK Dubey, has assumed charge here. Dubey who moved in here from Central Bank as its Executive Director during early Q4, has identified the problem as a high risk-aversive nature prevailing in the public sector lender. While this is partly understandable as PSBs have been reeling under asset quality concerns, Canara seems to have taken this fear to unreasonable limits.

There are only two possibilities for such a fear, one being that the top management has turned unnecessarily cautious at the economic situation prevailing in the country. More chances are for the second possibility, which is that the rank and file of Canara Bank is expecting more asset-quality skeletons to tumble out from the closet in the coming quarters, and in case of such a scenario, don’t want to take more risks which would affect NPA ratios and provisioning requirements drastically.

Since assuming charge, and faced with this situation, CMD Dubey has created a new set of strategies to improve credit growth. He has introduced cash incentives to encourage growth in four fronts viz. retail loans, fee income, CASA, and recovery of dues. It remains to be seen whether the incentive scheme would be successful, especially on improving the C/D ratio.

Though Canara Bank has declared FY’14 as the ‘Year of Retail’, even if it succeeds, retail loans are not expected to have the potential to replace the volumes lost in corporate loans, which are the bread-and-butter of all PSBs, including Canara. The evidence for this is obvious in the Q4 numbers itself, as Canbank has relied on more infrastructure loans, despite being troubled by bad infra loans already.

Meanwhile, news from abroad hints that Canara’s $1 billion dollar denominated bond has run into rough weather, despite high profile road shows conducted in London, Singapore, & Hong Kong.

All eyes will anyway be on the new strategies of Chairman RK Dubey, who is one of India’s most experienced bankers, having a career spanning 33-years at PNB, behind him. Dubey has studied law, management, HR, English, & banking as part of his higher education and training, and has been exposed to all aspects of banking at the highest possible level.

Whether he can pull out Canbank from the trouble it is in, is the billion dollar question facing all stakeholders including shareholders, clients, & employees.

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