Bank of Baroda (532134.IN) shares have fallen 17% in the last 8 weeks as investors fretted within the Indian lender’s soured loans. Nomura sees the dip like a good buying opportunity and it has upgraded the second largest government-controlled bank from neutral to purchase.

One reason analyst Adarsh Parasrampuria likes this stock is that the outlook due to the pre-provision operating profit (PPOP) is superior to its rivals, because of expected improvements in their net interest margins. Nomura forecasts PPOP to develop 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 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, in our opinion. Rating agency CRISIL recently indicated a 60% haircut of those 12 large accounts, which is similar to your 60% haircut assumption used to reach 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, using 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 carries 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) carries a very good provision coverage ratio in comparison 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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