Bank of Baroda (532134.IN) shares have fallen 17% in the last 2 months as investors fretted within the Indian lender’s soured loans. Nomura sees the dip like a good buying opportunity and it has upgraded the second biggest government-controlled bank from neutral to purchase.
The reason analyst Adarsh Parasrampuria likes this stock could be that the outlook due to the 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 triggered uncertainty over near-term P&L provisioning, but BOB’s NPA coverage at 58% may be the highest in the corporate banks and offers comfort, in our view. Rating agency CRISIL recently indicated a 60% haircut of those 12 large accounts, which is analogous to your 60% haircut assumption employed to arrive at 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 risen, with all the finance ministry indicating any merger of small PSU banks with larger ones. We presume 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, meaning 26% upside. The state-owned lender trades at Ten times forward earnings and pays a modest 0.8% dividend yield.
Bank of Baroda (BoB) features a quite strong provision coverage ratio in comparison with other public sector undertaking (PSU) banks. Their tier-I capital ratio is also significantly higher. While most other medication is consolidating their balance sheet, BoB is speaking about loan growth
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