Bank of Baroda (532134.IN) shares have fallen 17% during the last 2 months as investors fretted on the Indian lender’s soured loans. Nomura sees the dip as being a good buying opportunity and it has upgraded the second biggest government-controlled bank from neutral to buy.

One good reason analyst Adarsh Parasrampuria likes this stock would be that the outlook due to the pre-provision operating profit (PPOP) surpasses its rivals, because of expected improvements in their net interest margins. Nomura forecasts PPOP to grow at 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 improve the provisioning for 12 large NPA cases led to uncertainty over near-term P&L provisioning, but BOB’s NPA coverage at 58% could be the highest from the corporate banks and offers comfort, in our view. Rating agency CRISIL recently indicated a 60% haircut because of these 12 large accounts, which has similarities to our 60% haircut assumption employed to go 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 risen, using the finance ministry indicating a prospective merger of small PSU banks with larger ones. We believe 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 times forward earnings and pays a modest 0.8% dividend yield.
Bank of Baroda (BoB) features a strong provision coverage ratio when compared with other public sector undertaking (PSU) banks. Their tier-I capital ratio is also significantly higher. While most other medication is consolidating their balance sheet, BoB is talking about loan growth
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