Bank of Baroda (532134.IN) shares have fallen 17% in the last 60 days as investors fretted on 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 get.
One good reason analyst Adarsh Parasrampuria likes this stock could be that the outlook for the pre-provision operating profit (PPOP) is preferable to its rivals, thanks to expected improvements in the net interest margins. Nomura forecasts PPOP growing 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 increase the provisioning for 12 large NPA cases led to uncertainty over near-term P&L provisioning, but BOB’s NPA coverage at 58% will be the highest from the corporate banks and supplies comfort, as we see it. Rating agency CRISIL recently indicated a 60% haircut of those 12 large accounts, which has similarities to the 60% haircut assumption employed to reach 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 gone up, with the finance ministry indicating a prospective 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 includes a INR200 a share target price on Bank of Baroda, meaning 26% upside. The state-owned lender trades at 10 x forward earnings and pays a modest 0.8% dividend yield.
Bank of Baroda (BoB) includes a strong provision coverage ratio in comparison to other public sector undertaking (PSU) banks. Their tier-I capital ratio can be significantly higher. Some others are consolidating their balance sheet, BoB is talking about loan growth
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