Bank of Baroda (532134.IN) shares have fallen 17% during the last 8 weeks as investors fretted over 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.
A good reason analyst Adarsh Parasrampuria likes this stock could be that the outlook because of its pre-provision operating profit (PPOP) is better than its rivals, thanks to expected improvements rolling around in its net interest margins. Nomura forecasts PPOP growing within 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 boost 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 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 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 gone up, with all 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 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 good provision coverage ratio in comparison to other public sector undertaking (PSU) banks. Their tier-I capital ratio is also significantly higher. Many other people are consolidating their balance sheet, BoB is speaking about loan growth
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