Bank of Baroda (532134.IN) shares have fallen 17% during the last two months as investors fretted on the Indian lender’s soured loans. Nomura sees the dip as being a good buying opportunity and contains upgraded the second biggest government-controlled bank from neutral to get.
One reason analyst Adarsh Parasrampuria likes this stock could be that the outlook for its pre-provision operating profit (PPOP) is preferable to its rivals, because of expected improvements rolling around in its net interest margins. Nomura forecasts PPOP to cultivate with an average rate of roughly 13% between 2017-19.
Parasrampuria also likes the bob login provisioning as India’s central bank cracks down non-performing assets (NPA).
RBI’s recent directive to increase the provisioning for 12 large NPA cases led to uncertainty over near-term P&L provisioning, but BOB’s NPA coverage at 58% is the highest with the corporate banks and provides 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 used to get 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 increased, using the finance ministry indicating a prospective 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 has a INR200 a share target price on Bank of Baroda, meaning 26% upside. The state-owned lender trades at 10 x forward earnings and pays a modest 0.8% dividend yield.
Bank of Baroda (BoB) has a very good provision coverage ratio when compared with other public sector undertaking (PSU) banks. Their tier-I capital ratio is also significantly higher. While many other people are consolidating their balance sheet, BoB is discussing loan growth
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