Canara Bank has delivered a notable outperformance in Q4FY25, driven by robust treasury income, recoveries from written-off accounts, and a reversal of provisions. According to Emkay Research, which maintains a BUY rating on the stock with a target price of Rs 120, the bank’s earnings surpassed expectations by 20%, with RoA improving to 1.3%. With credit growth of 12.6% YoY and a 40 bps drop in GNPA to 2.9%, Canara Bank has demonstrated operational resilience. The research house forecasts a healthy RoA trajectory of 0.9–1.1% for FY26–28E and values the standalone bank at 0.9x FY27E ABV, with Rs 6/share from subsidiaries.

Strong Earnings Momentum Backed by Recoveries and Treasury Gains

Canara Bank posted a net profit of Rs 50,027 million in Q4FY25, exceeding estimates by 20%. This outperformance was fueled by a higher-than-expected other income and lower provisions, helping the bank beat profit forecasts. Pre-provision operating profit (PPOP) came in at Rs 82,837 million, up 12% YoY and 6% QoQ.

Treasury gains and recoveries from written-off loans formed a key part of the earnings boost. In fact, Rs 11 billion of provision reversal on security receipts was recorded, with Rs 5 billion contributing to profits and Rs 6 billion allocated for strengthening the provisioning coverage.

Stable Margins Despite Rate Pressures

Net interest margin (NIM) stood steady at 2.7% in Q4FY25, stabilizing after a declining trend over the past two quarters. This was achieved despite macro pressures, aided by better loan yields and interest income from liquidity deployed in RBI and interbank markets.

Going forward, the bank projects some pressure on NIMs in H1FY26 but expects a recovery in H2, targeting an average margin in the 2.75–2.8% range. An easing in deposit rates and favorable asset-liability management are expected to aid margin normalization.

Healthy Loan and Deposit Growth Continues

Loan growth stood at 12.6% YoY and 2.5% QoQ, driven by the retail segment, particularly housing and gold loans. The reclassification of agri gold loans to retail following revised PSL guidelines reduced priority sector lending obligations.

Deposits grew 11% YoY and 6.4% QoQ, while the CASA ratio improved by 94 bps to 28.5%, led by a 64% QoQ increase in current accounts. The bank aims for 10–11% advance growth and 9–10% deposit growth going forward.

Asset Quality Metrics Show Clear Improvement

Gross NPA declined by 40 bps sequentially to 2.9%, and Net NPA fell to 0.7%, backed by increased write-offs and recoveries. Specific provision coverage ratio (PCR) rose 258 bps to 77%, aligning with peer benchmarks.

The bank’s SMA book also improved to Rs 103 billion (1% of advances), though it remains elevated due to three large accounts, including two government-related ones. The management has committed to maintaining GNPA and NNPA below 2.5% and 0.6%, respectively, in FY26.

Strong Retail Momentum and Fee Income Drivers

Retail credit posted double-digit YoY growth in housing, vehicle, and education loans. Retail gold loans saw a significant jump to Rs 480 billion, up from Rs 10–20 billion, reflecting realignment under new PSL norms.

PSLC commission income stood at Rs 15.46 billion for FY25, with a 3% commission rate in Q4. This remains a healthy fee source, alongside interest income on NPAs, which contributed Rs 7 billion in Q4.

Operational Efficiency and Branch Expansion

The cost-to-income ratio held at 47.3%, while the bank’s liquidity coverage ratio (LCR) remains robust at 139–140%. Operating expenses were well-contained, with controlled opex helping boost profitability.

Canara Bank continues its network expansion with 500 branches added in the last two years and plans to open 250 more in FY26. Meanwhile, digital investments totaled Rs 8 billion in FY25, underlining its strategic focus on tech-led growth.

Revised Forecasts and Valuation

Emkay has raised Canara Bank’s FY26–28E earnings by 5–7%, factoring in improved treasury performance, recoveries, and lower credit costs. The bank is now projected to maintain RoA of 0.9–1.1% over the forecast period.

Valuation Summary:

Key Risks to Outlook

While the outlook is favorable, the bank remains vulnerable to:

A macroeconomic slowdown, which could impact loan growth and asset quality.

Compression in NIMs from rate volatility or deposit repricing.

Higher-than-expected provisioning from the implementation of ECL norms.

Investment Recommendation

Emkay Research reiterates a BUY rating on Canara Bank with a target price of Rs 120, offering a potential 26.3% upside from the CMP of Rs 95. The valuation is based on 0.9x FY27E adjusted book value, with Rs 6/share attributed to subsidiaries.

The bank’s healthy growth metrics, improving asset quality, and expanding digital footprint strengthen the investment case. Investors seeking exposure to high RoA PSU banks with improving efficiency and asset quality may find Canara Bank a compelling long-term play.