Given the strictures under which banks in India, especially the PSU banks have to operate, there is really very little to look forward to from the shareholder point of view
This venerable old bank was initially founded in Mangalore you guessed right by a Pai, and as far back as in 1906. But Canara Bank in its present avatar is a mere 43 years old having been nationalised way back in 1969 - by the then Indicate congress led by the late Mrs Indira Gandhi. It also lost its 'limited' suffix status after nationalisation. The bank is humongous in size with a total asset base of Rs 3,741 bn as at end March 2012. This asset base consists of investments of Rs 1,020.6 bn and advances of Rs 2,325 bn. Cash and bank balances with the RBI amount to Rs 178 bn. On the liabilities side of the equation the deposits amount to Rs 3,270.5 bn while borrowings threw in another Rs 155 bn for a total of Rs 3,425 bn. The liabilities include a capital base of Rs 4.4 bn which is backed up with reserves and surplus of Rs 222.5 bn.
Size can be very deceptive especially within the Indian banking industry which is governed by assorted government fiats on how the funds on hand should be deployed. And the effects of these guidelines are there for all to see. Of the total advances of Rs 2,325 bn, the advances within India amounts to Rs 2,215 bn, while the advances outside India amounts to around Rs 110 bn. That is to say a slice over 95% of all advances was within India, while the balance was advanced outside India. The bank has overseas operations in six countries - England, Hongkong, China, UAE and Bahrain. It also operates a joint venture bank in Russia in association with the State Bank of India. But these are mere pin pricks or some such in the overall scheme of things. Besides, there is no knowing given the reporting structure whether these branches contribute to the value add of its operations at the end of the day. (It has made rather impressive provisions on its cross border investments).
How the advances add up
Of the advances made in India, 31.3% was made to the priority sector, and another 15.6% to the public sector. These two together took way close to 47% of all advances. Thus close to 50% of all advances were made to sectors where the bank presumably had to lend at specified rates of interest and probably with no collateral in hand too. However, a subhead titled 'Others' accounted for the lion's share of 53.1%. Presumably this subhead infers the bank's freedom to lend to whom it wants to and at rates of interest which it was free to choose.
Separately another schedule lists out in detail the industry wise lending by the bank at year end. The total fund based lending to industry is valued at Rs 1,436 bn, while the non fund based lending is pegged at Rs 243 bn or a total of Rs 1,680 bn. These two lending figures do not tally with any of the figures in the schedule of 'advances in India' figures given elsewhere in the main body of the annual report. But let that be. According to this schedule the bank has advanced loans to 19 industrial sectors in India based on its industry classification. Its biggest single exposure in fund based lending is to the infrastructure sector accounting for 28.4% of the total. Close behind is lending to the Other Industries amounting to 26.6%.Thus these two sectors account for 55% of all fund based lending. Third in line is lending to basic metal industries with 11% of outstanding loans. This is followed by textiles with 7.8%, engineering with 5.1% and petroleum and coal products with 5%. Thus the top six sectors accounted for close to 84% of all outstanding industrial loans. It would appear from the lending pattern that the sector that cries out for maximum accommodation today is the infrastructure sector-made up of power/telecom/roads and ports and others. The individual industries constituting the 'Other Industries' sector is not readily quantifiable.
In the non fund based category too (where the bank stands guarantee, issues letters of credit etc but does not extend cash) the situation is only marginally different. The biggest outlay here is in the Engineering sector with 21% of all out standings, followed by infrastructure with 20.6%, and third in line is Metal Products with 10.9% of the total.
The excessive investment in government securities
The investment in government securities (after providing for depreciation of Rs 4.8 bn) amounted to a humungous Rs 887.6 bn, and accounted for over 87.4% of all such investments. It also has investments outside India amounting to Rs 5.3 bn but this value is after providing for depreciation of around Rs 1.5 bn. The depreciation accounts for 22% of gross investment. The investment in government securities including approved securities is a forced act - the end result of government fiats - and is based on statutory liquidity ratios or SLR for short. A category titled 'Others' accounted for another 8.3%, while investments in shares and debentures, and investments in subsidiaries etc were a miniscule 4.3%. This brings us to the question of what the 'Others' category pertains to, as the book value of investments in this sub-head was a not intangible Rs 84 bn. That is a sizeable sum of money. Such classifications are more than vague and only help to mask the reality.
Furthermore, barring current account deposits - or demand deposits as they are otherwise called-which account for a mere 4.5% of all deposits, and on which interest is not payable, the bank has little discretion on the interest that it pays on other deposit categories, as it is the kingmaker, the State Bank of India (SBI), which sets the benchmark interest in such matters. For the matter of record the savings bank deposits accounted for close to 20% of all deposits, while term deposits accounted for the balance 75.7% of all deposits. One gets to lend for the longest period on the term deposits, but practically speaking, the spread that the bank earns on such deposits may not be the best in range on offer.
The total demand and time liabilities at year end as stated earlier amounted to Rs 3,270.5 bn. The present SLR requirement for investment in approved securities fixed by the RBI is around 24%. Subsequently as per the latest RBI monetary policy review, the same has been revised to 23%. Thus on the basis of this requirement the investment in approved securities should strictly speaking amount to Rs 752 bn. The investments in approved securities on the other hand amounted to Rs 887 bn. That is to say such investments were Rs 135.4 bn more than is statutorily required. At least this is my understanding of how it is panning out. This is a whole lot more than is the mandatory requirement and by a mile at that. Are there no other safe avenues for banks to invest their funds please? Could the bank have earned more by investing these surplus funds elsewhere? There is no explanation forthcoming on this anomaly. It is only too obvious that the bank is playing it safe-real safe on this score.
Separately, there is the cash reserve ratio or CRR which is the amount of funds to be maintained with the RBI and calculated on all the deposits with the bank -on which it may or may not earn interest. The payment of interest is the prerogative of the Central bank. Currently the CRR rate is around 4.75%. For the matter of record the balance with RBI at year end amounted to Rs 168 bn. The interest earned on 'balances with RBI and other inter- bank funds' was Rs 3.6 bn. On the face of it the return on such year-end balances is small change-but obviously this is only a ballpark figure at best.
How its revenues and expenses add up
The point is that at the end of the day the interest earned from lending funds, from bill discounting, from investments and such like was simply not enough to bring home the bacon. The total interest income from all investments and lending grew 34.5% to Rs 308.5 bn. (Separately 'Other Income' tossed in another 29.3 bn - but these are incomes incidental to the main body of the income-commission, exchange and brokerage, profit on sale of investments, profit on exchange transactions and such like. These are also incomes which are indeterminable given the volatility in their capacity to deliver). But the interest that it expended to earn its keep rocketed sort of by 52% to Rs 231.6 bn. The growth in expenses was considerably higher than the growth in interest incomes. In the overall interest revenues of Rs 308.5 bn from operations that it jacked up - interest earned on funds advanced, bill discounting etc amounted to Rs 234.4 bn or 76% of the apple pie. Income from investments tossed in Rs 70.4 bn or another 22.8%. Interest on balances with RBI and other inter-bank funds brought in a miniscule 1.2%. That is to say risk taking funds brought in three quarters of the incomes while safe haven funds brought in the balance.
The reality of the economics of the business becomes rather stark when one realises that the net post tax profit for the year of Rs 32.8 bn is only slightly larger than the 'Other income' of Rs 29.3 bn. Okay the net profit for the year is after accounting for some tax provision obviously - but this sum is buried in a schedule sporting the name 'Provisions and Contingencies'. The 'provisions' schedule totes up to Rs 26.6 bn against Rs 20.6 bn previously. The figures debited under this schedule stretches from depreciation on investments, to provision for loan losses, write-off of non performing advances and investments, transfer to contingencies, provision for standard assets, tax provision and such like. The tax provision according to another schedule amounts to Rs 8 bn. In other words the provisions account for the balance Rs 18.6 bn under this schedule. It also infers that the pre-tax profit logged in at Rs 40.8 bn against Rs 50.3 bn previously. Thus the 'other income' in effect added up to 72% of pre-tax profit against a lower 56% previously. But, still, it speaks volumes of where the net margins are kicking in from. In all possibility banks get the complete benefit of provisioning for tax purposes. In which event the tax provision amounts to 19.6% of pre-tax profit.
The revenues on a segment wise basis
The business segment reporting schedule is another eye opener. It does not strictly report either the revenues generated by each segment and thus the margins that each division logs in (there are five divisions) as the sizeable 'other income' has been merged into the revenue figures and the bottom-line figures. This is difficult to comprehend as the other income is a separate entity in itself. But it still does offer a peak. It is the wholesale banking (corporate banking) operations which accounts for the largest chunk of segmental recvenues-51.1% of all revenues including other income, in the total revenues of Rs 338 bn. Wholesale banking operations also accounts for almost 48% of the segment assets, but it works out to a profit margin of 17.7%. The one segment pulling down profits is Treasury Operations. It accounts for 23% of segment revenues, 32% of segment assets, but this division has a profit margin of just 7%. Quite obviously the bank is facing a torrid season in its forex transactions or some such. The big winner here is retail banking operations (individual lending) accounting for 25% of revenues, 18% of segment assets and accounts for a 24% margin on profits.
The cash flow does not add up
It is not just in the margin generation front that the bank has to put up a brave face. The cash flow statement that it has churned out appears to be a bizarre concoction of sorts as involves the cash flow that it has generated from operating activities. It has arrived at a negative cash flow from operations of Rs 8.3 bn for 2011-12 against a positive cash flow of Rs 85.3 bn previously. Not only is it a fantastic negative turnaround in cash flow on the one hand, it is also not clear how the bank arrived at this net cash flow in either year. The figures arrived at in the statement of 'cash flow from operations' simply does not add up. Or am I reading it wrong perhaps? This is not a very pretty picture to say the least.
The bizarre accounting of its siblings
What of the overall picture of its several siblings? It has seven siblings as of date, one joint venture in Russia as stated earlier, and a few associates to boot. The parent holds 100% of the capital in three sibling - Canbank Venture Capital, Canbank Financial Services, Canara Bank Securities,70% in one-Canbank Factors Ltd, 69% in yet another-Canbank Computer Services and 51% in two others-Canara Robeco Asset Management Company and Canara HSBC Oriental Bank of Commerce Life Insurance Company. It has a 40% holding in Commercial Bank of India, a JV with SBI, incorporated in Russia. The parent's inter-se dealings with its siblings are kept to the minimum in both fund based and non-fund based activities - at least on the basis of the year- end figures on hand.
The brief financial statements of the abridged balance sheet and of the revenues of the individual companies do not appear to have been separately furnished. But from an extrapolation of the figures it appears that the siblings have added Rs 1.4 bn to the top line But, this gain in revenue growth is due to the 'other income' factor rather than due to any accretion in the main body 'interest earned' factor. In the consolidated statement the interest earned figure is less than that of the standalone statement figure! And, from the looks of it, the siblings have added not a dime to the bottom-line. The consolidated entity toted up a bottom-line of Rs 33.4 bn against the standalone profit of Rs 32.8 bn-implying that the siblings toted up a marginal net profit of their own. This profit also includes the net difference of the share of earnings of the associates less the net minority loss. The consolidated statements have accounted for the 'share of earnings' of associate companies of Rs 559 m, as also an entry showing a 'negative minority interest' of Rs 356 m.
All in all this is not a very exciting scenario at all.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.