Bank of Baroda (532134.IN) shares have fallen 17% within the last 8 weeks as investors fretted over the Indian lender’s soured loans. Nomura sees the dip like a good buying opportunity and it has upgraded the second largest government-controlled bank from neutral to get.
One good reason analyst Adarsh Parasrampuria likes this stock could be that the outlook because of its pre-provision operating profit (PPOP) is better than its rivals, due to expected improvements in their net interest margins. Nomura forecasts PPOP to cultivate at an average rate of roughly 13% between 2017-19.
Parasrampuria also likes the bob net banking provisioning as India’s central bank cracks down non-performing assets (NPA).
RBI’s recent directive to improve the provisioning for 12 large NPA cases resulted in uncertainty over near-term P&L provisioning, but BOB’s NPA coverage at 58% could be the highest with the corporate banks and offers comfort, in our opinion. Rating agency CRISIL recently indicated a 60% haircut for these 12 large accounts, which has similarities to our 60% haircut assumption used to arrive at our adjusted book.
However, the analyst can be involved about M&A risks given government moves to consolidate smaller public sector banks (PSU):
M&A risks have risen, with the finance ministry indicating any merger of small PSU banks with larger ones. We believe BOB’s valuation at 1.0x FY17F book vs. 0.5-0.6x FY17F book for smaller PSUs factors in M&A-related provisioning risks.
Parasrampuria includes a INR200 a share target price on Bank of Baroda, which means 26% upside. The state-owned lender trades at Much forward earnings and pays a modest 0.8% dividend yield.
Bank of Baroda (BoB) includes a very strong provision coverage ratio in comparison to other public sector undertaking (PSU) banks. Their tier-I capital ratio is additionally significantly higher. While many other medication is consolidating their balance sheet, BoB is discussing loan growth
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