Bank of Baroda (532134.IN) shares have fallen 17% in the last 60 days as investors fretted in the Indian lender’s soured loans. Nomura sees the dip being a good buying opportunity and has upgraded the second largest government-controlled bank from neutral to purchase.
The reason analyst Adarsh Parasrampuria likes this stock is that the outlook for the pre-provision operating profit (PPOP) surpasses its rivals, thanks to expected improvements rolling around in its net interest margins. Nomura forecasts PPOP to cultivate in 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 increase the provisioning for 12 large NPA cases triggered uncertainty over near-term P&L provisioning, but BOB’s NPA coverage at 58% is the highest from the corporate banks and gives comfort, in our opinion. Rating agency CRISIL recently indicated a 60% haircut because of these 12 large accounts, which has similarities to the 60% haircut assumption utilized to go to our adjusted book.
However, the analyst is concerned about M&A risks given government moves to consolidate smaller public sector banks (PSU):
M&A risks have gone up, with all the finance ministry indicating a potential merger of small PSU banks with larger ones. We feel 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 features a INR200 a share target price on Bank of Baroda, which implies 26% upside. The state-owned lender trades at 10 x forward earnings and pays a modest 0.8% dividend yield.
Bank of Baroda (BoB) features a very strong provision coverage ratio compared to other public sector undertaking (PSU) banks. Their tier-I capital ratio can be significantly higher. Many other medication is consolidating their balance sheet, BoB is talking about loan growth
For more info about bob net banking see our web portal: read