Bank of Baroda (532134.IN) shares have fallen 17% in the last two months as investors fretted in the Indian lender’s soured loans. Nomura sees the dip being a good buying opportunity and contains upgraded the second largest government-controlled bank from neutral to purchase.
One good reason analyst Adarsh Parasrampuria likes this stock is the outlook for the 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 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 boost 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 provides comfort, in our view. Rating agency CRISIL recently indicated a 60% haircut because of these 12 large accounts, which is analogous to the 60% haircut assumption utilized to get to 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 increased, together with the finance ministry indicating a potential 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 carries a INR200 a share target price on Bank of Baroda, which suggests 26% upside. The state-owned lender trades at Ten times forward earnings and pays a modest 0.8% dividend yield.
Bank of Baroda (BoB) carries a quite strong provision coverage ratio in comparison with other public sector undertaking (PSU) banks. Their tier-I capital ratio can be significantly higher. While most other people are consolidating their balance sheet, BoB is discussing loan growth
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