“The price-to-book value of CFH (5.48) is still very high and no one is expected to pay premium to the company’s market cap. So, the best CFH will get is its current market cap,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory.
If this is the case, the best value Canara Bank can get is Rs 21-22 billion (on the basis of CFH’s current market cap). This may not make a big difference to the bank’s overall financial position. This is because, the management expects the new rules on non-performing assets (NPA) introduced by the Reserve Bank of India (RBI) to result in additional slippages of Rs 20-25 billion. On the basis of the new rules, of the total standard restructured assets (Rs 70 billion as on December 31, 2017), around Rs 30 billion are likely to get resolved and the bank may have slippages worth Rs 20-25 billion, the management said. Thus, the new NPA framework would offset the gains from CFH’s stake sale.
What would help is the Rs 48.7 billion of recapitalisation funds and the management’s intention to sell more non-core assets such as Can Factors (70 per cent stake) and Canara Computer Services (69.1 per cent stake). However, mounting bad loans (net NPA of Rs 253 billion as on December 31, 2017) will be a concern.
The management expects a double-digit credit growth on a year-on-year basis in the ongoing quarter (Q4). It does not see any significant impact due to the RBI’s ban on letters of undertaking.
Though HDFC Bank is said to have emerged as a front-runner to acquire Canara Bank’s 30.4 per cent stake in CFH and the Street is positive about this, investors should avoid public sector banks as of now, given fraud-related issues.