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 being 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 for the pre-provision operating profit (PPOP) is superior to its rivals, as a result of expected improvements rolling around in its net interest margins. Nomura forecasts PPOP to grow at an average rate of roughly 13% between 2017-19.
Parasrampuria also likes the bobibanking 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 resulted in uncertainty over near-term P&L provisioning, but BOB’s NPA coverage at 58% could be the highest of the corporate banks and offers comfort, in our opinion. Rating agency CRISIL recently indicated a 60% haircut of these 12 large accounts, which has similarities to the 60% haircut assumption utilized to arrive at 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, using the finance ministry indicating a prospective merger of small PSU banks with larger ones. The world thinks 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 Much forward earnings and pays a modest 0.8% dividend yield.
Bank of Baroda (BoB) features a quite strong provision coverage ratio compared to other public sector undertaking (PSU) banks. Their tier-I capital ratio is also significantly higher. Some other medication is consolidating their balance sheet, BoB is discussing loan growth
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