Canara Bank: the 3.5% dividend yield is real

Canara Bank (NSE: CANBK) is India’s sixth-largest government-owned bank by market cap. In FY26, it posted global business of Rs 28.06 lakh crore and a record net profit of Rs 19,187 crore (+12.7% YoY). What happened: FY26 total income rose 7.73% YoY to Rs 1,53,204 crore. Net interest income grew only 0.37% to Rs 37,210 crore despite advances rising 15.3%, because yield on advances fell 54 bps from 8.83% to 8.29% as rate cuts passed through a loan book where over 53% is repo-linked. NIM compressed 29 bps to 2.51%. The cost-to-income ratio rose 118 bps to 48.45%. Operating profit grew 5.19% to Rs 33,019 crore; lower provisions (-3.7%) helped net profit expand. Gross NPA fell to 1.84% from 2.94% in FY25; Net NPA fell to 0.43%. Provision Coverage Ratio stood at 94.21%. CRAR was 17.04% in FY26. The board declared Rs 4.20/share for FY26, a 3.5% yield at Rs 120. Why it matters: The payout ratio was 19.8% of net profit, below the CPSE minimum floor of 20%. As a CPSE, the bank must also allocate 25% of net profit to statutory reserves before paying dividends. Management targets 10-11% business growth in FY27, NIM stable at 2.50-2.60%, Gross NPA at 1.50%. What I am watching: Whether NIM stabilises above 2.50% as rate cuts slow, whether the payout ratio crosses 20% in FY27, and Q1 FY27 net profit trajectory. My stance: At roughly 0.9x book, the market prices in NIM pressure and muted earnings growth. The dividend yield of 3.5% is real but the payout ratio has room to grow if profits hold. The core balance sheet is clean, with NPAs at multi-year lows. The central risk is NIM compression from a heavily repo-linked book in a rate-cut cycle. I do not hold a position in Canara Bank at the time of writing. This is not investment advice.