Canara Bank asset quality improved sharply but NIM pressure capped profit growth
Gross NPA fell 110 bps to 1.84%, but net interest income was flat and NIM compressed 22 bps to 2.51% as deposit growth lagged credit expansion.
What's new
- Gross NPA ratio improved 110 bps to 1.84%; net NPA down 27 bps to 0.43%.
- Net profit rose 12.69% to ₹19,187 cr, but net interest income was flat at ₹37,210 cr.
- NIM compressed 22 bps to 2.51% on higher cost of funds amid systemic liquidity tightness.
- Retail advances surged 32.93% YoY; RAM portfolio now 59% of advances.
Themes from the call
Asset Quality
Gross NPA improved 110 bps to 1.84%, net NPA 0.43%, PCR at 94.21%, with FY27 target of gross NPA 1.50%.
Margins
NIM fell 22 bps to 2.51% as cost of funds rose; FY27 guidance of 2.52-2.60% implies modest recovery.
Capital Allocation
CAR improved to 17.04% (up from 16.33%); subsidiary listing gains of ~₹2,000 cr provided buffer.
Guidance watch
- FY27: advances growth 11-12%, deposits 9-10%, global growth 10-11%.
- NIM expected 2.52-2.60% - implies 1-9 bps recovery from current 2.51%.
- Gross NPA target of 1.50%, net NPA 0.40% for FY27.
Risk flags
- Deposit growth (9.71%) substantially lagging credit growth (15.30%) - structural deficit intensifying competition.
- Net interest income flat despite 15.30% advance growth; margin recovery guidance modest.
- Contingent liabilities of ₹6,04,935 cr (LCs, guarantees) - normal but large.
The brief
Canara Bank's asset quality took a sharp turn for the better in FY26. Gross NPA fell 110 basis points to 1.84%, net NPA to 0.43%, and the provision coverage ratio rose to 94.21%. Net profit climbed 12.69% to ₹19,187 crore. That is the headline the bank will want investors to see. But the numbers beneath show a bank that grew its loan book 15.30% and got almost nothing from it. Net interest income was flat at ₹37,210 crore. Net interest margin compressed 22 basis points to 2.51% as the cost of funds rose, driven by an economy-wide liquidity squeeze and a structural deposit deficit: deposits grew only 9.71% against 15.30% advance growth. That mismatch is the most consequential risk in the FY27 outlook. Management guided for advances growth of 11-12% and deposits growth of 9-10%, which, if realized, would keep the gap open. The NIM guidance of 2.52-2.60% implies a modest recovery of 1-9 basis points, which is hardly a victory lap. The bank is pivoting toward retail, agriculture, and MSME lending, which now accounts for 59% of the portfolio. Retail advances grew 33% year-on-year, led by housing and vehicle loans. That shift improves capital efficiency and risk-adjusted returns, but it also tilts the book toward lower-yielding assets, which could cap NIM recovery even as deposit costs stabilize. Capital is not a constraint: the CAR stood at 17.04%, helped by ₹2,000 crore in subsidiary listing gains. Asset quality guidance — gross NPA target of 1.50% for FY27 — is ambitious but credible given the current trajectory. The open question is whether the deposit deficit forces the bank to sacrifice margin for growth, or vice versa. Today's numbers suggest both ends cannot be served equally well.
Good on bad loans, but core earnings remain under pressure from a deposit deficit that NIM guidance of 2.52-2.60% does little to resolve.