Bank of Baroda (532134.IN) shares have fallen 17% within the last two months as investors fretted in the Indian lender’s soured loans. Nomura sees the dip like a good buying opportunity and contains upgraded the second biggest government-controlled bank from neutral to purchase.
A good reason analyst Adarsh Parasrampuria likes this stock is the outlook for its pre-provision operating profit (PPOP) is preferable to its rivals, due to expected improvements in the 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 improve the provisioning for 12 large NPA cases triggered uncertainty over near-term P&L provisioning, but BOB’s NPA coverage at 58% will be the highest in the corporate banks and supplies comfort, in our view. Rating agency CRISIL recently indicated a 60% haircut of those 12 large accounts, which is analogous to the 60% haircut assumption accustomed to go to 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 gone up, with all the finance ministry indicating any 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 times forward earnings and pays a modest 0.8% dividend yield.
Bank of Baroda (BoB) features a very strong provision coverage ratio compared to other public sector undertaking (PSU) banks. Their tier-I capital ratio is additionally significantly higher. Many other people are consolidating their balance sheet, BoB is referring to loan growth
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