Bank of Baroda (532134.IN) shares have fallen 17% during the last two months as investors fretted within the Indian lender’s soured loans. Nomura sees the dip being a good buying opportunity and possesses upgraded the second biggest government-controlled bank from neutral to purchase.
One good reason analyst Adarsh Parasrampuria likes this stock could be that the outlook for its pre-provision operating profit (PPOP) is superior to its rivals, because of expected improvements rolling around in its net interest margins. Nomura forecasts PPOP growing 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 raise the provisioning for 12 large NPA cases resulted in uncertainty over near-term P&L provisioning, but BOB’s NPA coverage at 58% will be the highest of the corporate banks and supplies comfort, in our opinion. Rating agency CRISIL recently indicated a 60% haircut because of these 12 large accounts, which is analogous to our 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 any merger of small PSU banks with larger ones. The world thinks 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 carries a INR200 a share target price on Bank of Baroda, which implies 26% upside. The state-owned lender trades at Ten times forward earnings and pays a modest 0.8% dividend yield.
Bank of Baroda (BoB) carries a very strong provision coverage ratio compared to other public sector undertaking (PSU) banks. Their tier-I capital ratio can also be significantly higher. While most others are consolidating their balance sheet, BoB is talking about loan growth
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