Canara Bank to expand overseas

BS Reporter / Chennai/ Bangalore November 12, 2007

Canara Bank is expanding its overseas branch network by adding five more branches in various countries in the next few months. The bank has received an approval from the Reserve Bank of India for opening branches in 21 international locations identified for expansion in the medium-term. According to Canara Bank chairman and managing director MBN Rao, the bank plans to open branches at Johannesburg, Frankfurt, Muscat, QFC-Qatar and Bahrain this year. Its representative office at Shanghai is being converted into a full-fledged branch shortly. He told reporters here that the bank had set a target of achieving a global business level of Rs 290,000 crore for 2007-08, with a growth rate of over 20 per cent, comprising Rs 170,000 crore under deposits and Rs 120,000 crore under advances. Advances growth will be significantly driven by agriculture, SMEs, infrastructure and other productive segments, including services sector. In an effort to improve its visibility and position itself as a strong customer-centric bank, the management of Canara Bank has undertaken a brand-building exercise. We have appointed brand design firm, Ray+Keshavan to prepare a strategy for the bank. The entire branding exercise is focused on the banks overall objective of responding to the changing times, customer preferences and articulating its long-term vision, Rao said. The bank has also formulated a new marketing strategy to execute strategies and realise its business goals. It has roped in Boston Consulting Group for a comprehensive study on corporate business strategy. Setting up of customer relationship management module and a dedicated call centre are presently underway, he said. Under financial inclusion, the bank has set a target for mobilising one million no-frill accounts during FY08 and bring balance 11 lead districts of the bank under total financial inclusion by December 2007. Besides, the bank aims to set up one lakh self help groups (SHGs) during the present financial year, including 22,000 SHGs in the urban locations, he added.

Rs 4.5 billion bonds issue: AA+ Reaffirmed Canara Banks rating reflects its strong market position, adequate capitalisation levels, and comfortable liquidity profile. The rating also factors the banks business profile that is supported by a good resources position, as well as its better asset quality as compared to its peers. Crisil also considers the Government of Indias (GoI) majority ownership of Canara Bank to be a positive rating factor. The banks earnings profile is characterised by moderate although improving profitability. Strong market position: Canara Bank ranks among the top five banks in the country, in terms of size of both deposits and assets. As at March 31, 2002, Canara Bank had a market share of 5.32 per cent of total deposits and 5.13 per cent of total advances of all scheduled commercial banks (SCBs). It is one of the few national players in the banking industry with a network of more than 2,400 branches spread all across the country. Canara Banks strong market position is underpinned by its nationwide presence and its large and diversified balance sheet. This strong market position gives Canara Bank significant advantages in raising resources, besides bringing in diversity of assets. Adequate capitalisation levels: Canara Banks capital position is characterised by a moderate Tier I capital ratio, reasonably large capital base, and comfortable networth coverage of net non-performing assets (NPAs). At 7.85 per cent as at March 31, 2003, Canara Banks Tier I capital adequacy ratio is moderate and is comparable with that of the better public sector banks. Canara Banks reasonably large capital base of Rs 41.49 billion as at March 31, 2003 provides comfort against large asset-related shocks. The networth coverage for net NPAs at 2.85 times provides substantial comfort to its existing capital position. Good resource and liquidity profile: Canara Banks good resource profile accrues from its large and geographically well-diversified deposit base (which emanates from its national presence), healthy resource mix, and steady growth in deposits. Further, a significant proportion of the banks branches (42 per cent) are in the semi-urban and rural areas, which provides it with a relatively stable source of funds, given the limited presence of the new private sector banks in these areas. Canara Banks liquidity position continues to be comfortable, and is supported by a steady growth in deposits, access to the inter-bank call money market, and investments above regulatory requirements in highly liquid Government Securities. At 7.22 per cent for the financial year 2001-2002 on a daily average basis, deposit costs for Canara Bank are marginally higher than those of its peers. Good asset quality: Canara Banks good asset quality is characterised by a significant exposure to clients that have a high credit quality, relatively low gross and net NPAs as compared to its peers. Moreover, its asset base is well-diversified both geographically and across industries. However, the slippages to NPAs have increased in the financial year (FY) 2003 to 3.71 per cent.

Canara Banks asset quality is better than that of most of the other public sector banks as reflected in its lower gross NPAs and net NPAs of 5.96 per cent and 3.59 per cent respectively as at March 31, 2003. Moreover, there has been a consistent reduction in gross and net NPAs, which can be attributed to lower slippages to NPAs, and significant recoveries from the NPA accounts. In future, Canara Bank plans to increasingly focus on the retail segment, with a thrust on housing finance. Canara Banks ability to strengthen its credit risk management systems in its retail finance portfolio needs to be demonstrated. Majority Government ownership provides comfort: While the risk profile of the Indian banks loan portfolio is high, the key factors supporting their ratings include - a strong liquidity position, limited vulnerability to external capital flows, and the high likelihood of support in the event of a bank getting into difficulty. Public sector banks additionally benefit from the high likelihood of support arising from their ownership by the Government of India (GoI). In Crisils opinion, the likelihood of support is underpinned by strong economic and moral imperatives to provide support, given the role that the banking system plays in the Indian economy. Crisil considers the majority Government ownership of Canara Bank to be a positive rating factor. Moderate earnings profile: Canara Banks earnings profile is characterised by moderate profitability and moderate diversity in income. Canara Banks profitability is moderate as witnessed in moderate net profitability margin of 1.5 per cent for the financial year 2002-2003. Canara Banks core fee-based income (defined as commission, exchange, and brokerage, and forex income) at 1.06 per cent of average funds deployed is also moderate and is comparable to its peers. Given the better credit quality of its advances portfolio, the need for future provisioning would be limited for Canara Bank. Canara Banks future profitability would, however, be affected, as in the previous years, due to additional provisioning on account of the envisaged shortfall in servicing the dues of its wholly-owned subsidiary, Canbank Financial Services Limited (Canfina). Canara Bank envisages a total shortfall of Rs 6.38 billion in Canfinas ability to service its obligations, of which the bank has already made a cumulative provision of Rs 4.02 billion as at the end of financial year 2002-2003, to provide support to Canfina in servicing this obligation. Business Description Canara Bank commenced operations on July 1, 1906, as the Canara Hindu Permanent Fund. The banks name was changed to Canara Bank Ltd in 1910. Canara Bank was nationalised during the first round of bank nationalisation in 1969. As at March 31, 2003, the bank had an asset base of Rs 820.55 billion, and a deposit base of Rs 720.95 billion. The bank has a domestic branch network of 2,408 branches, of which nearly 42 per cent are in the rural and semi-urban areas. This provides it with a strong retail deposit base. The bank has an overseas branch in London. Canara Bank has a number of subsidiaries and associates, which are involved in businesses like housing finance, factoring, asset management, and merchant banking. Moreover, the bank has a venture fund, which is the only bank-sponsored venture fund in India. As a fallout of the 1992 securities scam, some of these subsidiaries faced problems. Most of the issues have now been resolved, however. The bank also supports eight regional rural banks, of which four are in Karnataka, three in Uttar Pradesh, and one in Kerala. Industry Outlook

The Indian banking industry is going through a phase of transformation and convergence. This transformation is evident on both the assets and the liability side. On the asset side, banks are shifting from their historical business model of providing finance to corporates to aggressively focus on financing retail assets such as housing loans, automobiles and commercial vehicles. This is driven both by the weak demand from corporates as well as the paucity of clients with good credit quality. On the liability side, the transformation is from a passive retail strategy to a very active retail thrust to attract and retain customers and increase the deposit base. The entry of the newer private sector banks and the marketing strategy adopted by them has precipitated this transformation. Apart from this transformation, banks are also going through a phase of convergence wherein almost all banks are offering the entire gamut of products and services on the asset and liability side to both retail as well as wholesale customers. Hitherto, retail assets were primarily the domain of non-banking finance companies and most banks did not actively offer the full range of products to their customers even though they had the required distribution infrastructure and retail client base. Going forward, Crisil believes that the financial sector in general and the banking sector in particular shall witness intense competition on both the asset and the liability side, which would squeeze the margins of all players. In such a scenario, strong brand equity, a wide product range, competitive pricing and differentiated customer-servicing capabilities shall be key success factors. Banks need to effectively use technology to improve their service levels and provide new delivery platforms to customers. In addition, their financial performance shall be driven by their ability to grow the business and attain economies of scale. Crisil expects the new private sector banks to leverage their efficient cost structure, focused marketing approach and technological edge to generate market share at the cost of the public sector banks, whose response time could be constrained by their legacy systems and decision-making processes. Consolidation and strategic alliances between banks and other financial sector players such as insurance companies and mutual funds are also expected as banks attempt to enhance their product range and reduce costs. While the recent Act on Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest is expected to aid banks in their NPA recoveries, a banks historical asset quality and its ability to manage the performance of its newly-built retail portfolio shall continue to be key challenges. Rating Sensitivity Factors Canara Banks ability to maintain its asset quality and sustain the control on its NPA levels would be a key rating sensitivity. Moreover, the banks ability to maintain adequate capitalisation levels and take on the intense competition, especially in retail banking, will be critical for its future performance. The GoIs majority ownership of Canara Bank is a key rating driver.