Bank of Baroda (532134.IN) shares have fallen 17% during the last 60 days as investors fretted on the Indian lender’s soured loans. Nomura sees the dip as a good buying opportunity and it has upgraded the second largest government-controlled bank from neutral to buy.

The reason analyst Adarsh Parasrampuria likes this stock could be 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 develop at an average rate of roughly 13% between 2017-19.
Parasrampuria also likes the bobibanking provisioning as India’s central bank cracks down non-performing assets (NPA).
RBI’s recent directive to boost the provisioning for 12 large NPA cases led to uncertainty over near-term P&L provisioning, but BOB’s NPA coverage at 58% could be the highest of the corporate banks and offers comfort, in our view. Rating agency CRISIL recently indicated a 60% haircut of these 12 large accounts, which has similarities to our 60% haircut assumption accustomed to arrive at our adjusted book.
However, the analyst is worried about M&A risks given government moves to consolidate smaller public sector banks (PSU):
M&A risks have risen, using 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 suggests 26% upside. The state-owned lender trades at 10 x forward earnings and pays a modest 0.8% dividend yield.
Bank of Baroda (BoB) carries a strong provision coverage ratio compared to other public sector undertaking (PSU) banks. Their tier-I capital ratio is also significantly higher. While many others are consolidating their balance sheet, BoB is talking about loan growth
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