Bank of Baroda (532134.IN) shares have fallen 17% within the last 8 weeks as investors fretted in the Indian lender’s soured loans. Nomura sees the dip like a good buying opportunity and has upgraded the second largest government-controlled bank from neutral to get.
The reason analyst Adarsh Parasrampuria likes this stock is that the outlook for 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 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 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, as we see it. Rating agency CRISIL recently indicated a 60% haircut because of these 12 large accounts, which is similar to our 60% haircut assumption accustomed to reach 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 increased, with the finance ministry indicating a possible 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, which means 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 quite strong provision coverage ratio in comparison with other public sector undertaking (PSU) banks. Their tier-I capital ratio is additionally significantly higher. While many other people are consolidating their balance sheet, BoB is discussing loan growth
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