New Delhi: Investors of Canara Bank Limited are nervous. The specter of possible impact of expected credit loss (ECL) norms is also a cause for concern as the March quarter (Q4FY23) results, announced on Monday, were largely in-line.
In the earnings call, the management of the bank said that it has assessed about 42,000 crore ECL provision over five years, which comes to approx. 8,000-8,500 crores annually. This is based on the draft ECL guidelines of the Reserve Bank of India (RBI). Some analysts believe the estimated amount is higher. Note that making more provisions can affect the return ratio of the bank. Another concern is that if these norms are implemented, it may reduce the need for capital in the near term.
“The announcement from the Canara Bank management that it will have to make a 4-5% loan-loss provision to comply with the ECL transition has come at an unexpected time, as the work on the transition is yet to be announced by the regulator. Has gone, said the report of Kotak Institutional Equities.
In January, the RBI released a draft paper on ECL norms. Under this, banks will have to classify loans under three categories – Stage 1, Stage 2, and Stage 3, based on assessed credit losses and make provisions accordingly. “Within the SOE (state-owned entities) banks we cover, we see a relatively greater impact on Canara and Punjab National Bank: We quote: 1) relatively low coverage ratio, 2) historically relatively high gross and net NPL formation and credit cost, and 3) relatively lower capital ratios,” said a May 10 Morgan Stanley report on ECL norms.
Meanwhile, in Q4, Canara Bank’s loans grew 18% year-on-year (yoy), but deposit growth was slow at 9%. The management expects moderation in FY24 and has given credit growth guidance of 10.5%. Net interest margin is seen at 3.05% in FY24 versus 2.95% in FY23. Revaluation of MCLR loans (around 49% of the loan book) is expected to offset the increase in cost of funds.
Certainly, Canara Bank investors are sitting on handsome returns of around 51% in the last one year. The road ahead could be a tough one, especially because of concerns over ECL. Canara Bank shares have declined 5.6 per cent so far this week.
“Until there is clarity on ECL norms, Street will assume higher ECL requirements for Canara Bank as well as other PSU banks. This concern is likely to keep the near-term outlook of the stock muted, said Mona Khaitan, Vice President, Daulat Capital Markets. This is even as the asset quality outlook has improved and continues to be a key driver for RoA expansion.
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