Mutual funds are showing renewed interest in Bank of Baroda stock, making it an attractive option for some investors. After a prolonged period of declining mutual fund holdings, Bank of Baroda stock is now receiving positive attention. This comes after a mixed market sentiment, where many PSU bank stocks, including Bank of Baroda, experienced some rough patches. With mutual funds increasing their holdings, it’s important to assess if you should consider buying Bank of Baroda shares. Let’s break down some factors that might help you decide.
Bank of Baroda Stock : Market Dip and Recovery
On January 6, 2025, banking stocks, particularly in the PSU sector, suffered a significant dip, with Bank of Baroda seeing a 6% decline. This drop mirrored the broader market trend, with concerns arising from disappointing December quarter provisional numbers. However, Bank of Baroda stock price showed signs of recovery on January 7, closing nearly 2% higher at INR 232.
While these numbers are not exceptional, the key factor here is the rising interest from mutual funds. For the first time in at least seven quarters, mutual fund holdings in Bank of Baroda have increased, signaling that institutional investors are taking a renewed interest in the stock.
Why Are Mutual Funds Investing in Bank of Baroda?
Mutual funds are increasing their holdings in Bank of Baroda due to its attractive valuation and potential for future growth. Currently, the price-to-book ratio of Bank of Baroda is around 1x, which is considered favorable, especially when compared to larger PSU banks like SBI, which is trading at a higher price-to-book ratio of 1.7x.
Funds like HDFC Small Cap Fund and SBI Balanced Advantage Fund have recently bought Bank of Baroda stock, signaling optimism about the bank’s long-term potential. In particular, HDFC Small Cap Fund increased its stake in the bank in November after a 15-month hiatus, while SBI Balanced Advantage Fund became a net buyer starting in September and continued to buy more shares in the following months.
Why Did Mutual Fund Holdings in Bank of Baroda Decline Previously?
Before this recent increase in holdings, mutual funds had reduced their positions in Bank of Baroda due to several factors. Over the past couple of years, regulatory challenges and slower-than-expected business growth weighed on investor sentiment.
A notable issue was the Reserve Bank of India’s decision to block the bank’s customer onboarding process via its digital platform, BoB World, due to lapses in the onboarding process. This caused concern among investors, especially given the bank’s reputation as one of the more technologically savvy PSU banks. While the restriction was lifted in May 2024, concerns over slower deposit growth and potential defaults on unsecured loans continued to affect the stock.
A Fresh Perspective on Bank of Baroda’s Growth
In the wake of the September quarter earnings, analysts are now viewing Bank of Baroda with a more positive outlook. Kotak Institutional Equities maintained its ‘add’ rating on the bank, acknowledging that the regulatory and business challenges have not significantly affected its profitability ratios.
The management of Bank of Baroda, led by CEO Debadatta Chand, has outlined stable growth targets, aiming for a return on assets (RoA) above 1%. Additionally, the bank has kept its net interest margin (NIM) guidance steady at 3.15%, suggesting optimism for continued stability in the coming quarters.
Should You Buy Bank of Baroda Stock? Key Factors to Consider
If you’re considering buying Bank of Baroda stock, here are three crucial factors to weigh in your decision:
- Valuation
ICICI Securities has a ‘buy’ rating on Bank of Baroda, valuing the bank at approximately 1x its FY27 estimated adjusted book value (ABV) with a target price of INR 300. This suggests a potential 29% upside from the current stock price of INR 232. However, Jefferies downgraded the stock to a ‘hold’ rating, reducing the target price by 13%, citing limited room for re-rating. - Deposit and Loan Growth
While Bank of Baroda has faced slower deposit growth, its loan growth has remained healthy. The bank recently revised its FY25 deposit growth target to 9%-11%, lower than its previous target. However, its advances (loans) grew at an 11.7% year-on-year rate, suggesting that loan growth remains robust despite deposit challenges. - Asset Quality
Asset quality will be closely monitored by both analysts and investors. Bank of Baroda’s gross non-performing assets (NPAs) fell to 2.50% in the September quarter, signaling improvement in asset quality. Analysts believe the bank’s efforts to reduce exposure to unsecured loans will help limit the risk of defaults and safeguard its overall asset quality.
Conclusion: Is Bank of Baroda a ‘Value Buy’?
While Bank of Baroda may not be experiencing the same level of growth as its peers, the stock’s current valuation, combined with the potential for improvement in asset quality and the stability under the leadership of Debadatta Chand, make it an appealing option for investors seeking value stocks.
If you’re interested in buying Bank of Baroda stock, it’s essential to consider factors such as valuation, growth prospects, and asset quality. As the stock shows potential for upside, it could be a solid option for long-term investors, especially those with a focus on value investing.
However, as with any investment, it’s crucial to stay updated on the bank’s performance and the broader market trends before making a decision. Bank of Baroda stock might just be a ‘value buy’ for those looking for long-term opportunities in the banking sector.
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