Last Updated – August 2020
In this article, we will cover
– Importance of the Banking sector in India
– Things to consider while picking the best banking stocks to buy
– A comprehensive and well-researched list of the best bank shares to buy now in India
– A model portfolio to gain exposure to the best banking stocks in India
– Portfolio companies
– A detailed table consisting of various parameters factored in to evaluate the best bank shares to buy now in India
Importance of the Banking sector in India
Banking sector is the backbone of the economy which also goes through its own phases of ups and downs. When everything in the economy is rosy, lending and borrowings boom and this in turn leads to healthy growth in banks. And when going gets tough, defaults rise and this leads to increase in bad assets (bad loans). Last year, Prime Minister Narendra Modi set a USD 5Tn economy target for India Inc. which is to be achieved within the next five years. However, taking into consideration various challenges due to lockdowns and economic slowdown, credit from banks must grow close to 12% every year in order to at least aim for a USD 5 trillion economy figure by 2024. And these banking players have always remained resilient, growing consistently through multiple economic cycles in order to capitalize on every opportunity.
While considering an investment in financials especially in the banking space, utmost importance is placed on management’s understanding of resilient growth-risk matrix. A bank should ideally be cherry picked on the sheer balance between garnering market share and not distorting the risk matrix in place in order to chase market share. One should carefully look at the banking players keeping in mind the fundamental historical performance of these banking players and those players that have managed to show certain degree of predictability in their financial performance. Investors should consider growth in profitability, color and growth of advances and deposits along with adequate buffer capital and trend of non-performing asset and NIM while investing in banks. Hence, one should carefully choose to look at banks with matrix such as formation of low net NPA (i.e. between 0.30%-2%) over the years, strong CASA ratio (current account and savings account ratio) which is above 40%, have sufficient capital buffer in terms of CRAR constantly well above RBI standards of 9%, consistent and robust net interest margins (i.e. above 3%) along with consistent growth in advances as well as deposits (nearly above 10-20% YoY growth).
Summary of Best Banks to Buy now in India
|Sr. No.||Company Name||BSE Scrip Code||NSE Symbol||CMP (as on July 03, 2020)||Rating (Stars)||Industry|
|1||HDFC Bank Ltd.||500180||HDFCBANK||1074.2||4.5||Bank – Private|
|2||Kotak Mahindra Bank Ltd.||500247||KOTAKBANK||1353.5||4||Bank – Private|
|3||ICICI Bank Ltd.||532174||ICICIBANK||361||4||Bank – Private|
|4||Axis Bank Ltd.||532215||AXISBANK||428.5||4||Bank – Private|
|5||Bandhan Bank Ltd.||541153||BANDHANBNK||346.3||4||Bank – Private|
|6||IDBI Bank Ltd.||500116||IDBI||50.6||0.5||Bank – Private|
|7||IndusInd Bank Ltd.||532187||INDUSINDBK||487.3||4||Bank – Private|
|8||Yes Bank Ltd.||532648||YESBANK||26.2||0.5||Bank – Private|
|9||IDFC First Bank Ltd.||539437||IDFCFIRSTB||26.8||0.5||Bank – Private|
|10||The Federal Bank Ltd.||500469||FEDERALBNK||53||2||Bank – Private|
|11||City Union Bank Ltd.||532210||CUB||123.8||4.5||Bank – Private|
|12||RBL Bank Ltd.||540065||RBLBANK||173.5||2||Bank – Private|
|13||CSB Bank Ltd.||542867||CSBBANK||183.6||0.5||Bank – Private|
|14||State Bank of India||500112||SBIN||184.8||1||Bank – Public|
|15||Punjab National Bank||532461||PNB||36||0.5||Bank – Public|
|16||Bank of Baroda||532134||BANKBARODA||50.8||1||Bank – Public|
|17||Union Bank||532477||UNIONBANK||32.1||0.5||Bank – Public|
|18||Indian Overseas Bank||532388||IOB||11.13||0.5||Bank – Public|
HDFC Bank has created its industry-leading position by catering majorly to individuals and focused on every aspect of retail banking including private banking and wealth management. The bank has maintained its top notch asset quality (0.35% lowest NPA in the industry) while growing business in double digits over years. HDFC Bank has always been strong, growing consistently through multiple economic cycles which is succinctly reflected in its stock performance of CAGR 15% in 5 years. However, it is pertinent to note that the Bank has nearly 30% of total loan portfolio in unsecured loans and this has constantly aided the growth of bank.
Give the unprecedented impact by COVID-19 situation on varied businesses, its unsecured portfolio performance may get severely impacted and needs to be given closer look. HDFC Bank being aware of this took a pragmatic approach and from FY2019-20 shifted focus on wholesale banking segment which aided counter the downturn in certain retail segments as a result of an overall slowdown in consumption. Accordingly, HDFC Bank maintained a prudent approach by balancing between both segments (corporate and retail) of business in order to grow consistently in a prudent manner.
Uday Kotak led, Kotak Mahindra Bank is one of India’s leading financial services conglomerates, providing a wide span of various financial and banking solutions with a reach of 1600 branches and 2,519 ATMs across India. Kotak Mahindra Bank, too, emerged as a player who adopted prudent and cautious approach, targeting only high-rated customers and sectors and this aided bank’s low levels of bad loan formation over the years (Net NPA at 0.71%). This banking behemoth has managed to achieve NIM and profit at CAGR of 23% and 24% respectively in 5 years and has managed to grow advances at 29% CAGR in 5 years. Bank’s deposit franchise continues to be granular and robust with deposit accretion staying healthy with industry leading CASA ratio of 56.20%. Bank has maintained its cautious stance towards unsecured retail, credit cards and small business lending. Bank’s 70% of the advances is given to corporate and business, home loans & LAP and agriculture segment with corporate and business division with highest exposure of nearly 40%.
Axis Bank and ICICI Bank along with above mentioned private sector lenders have been successful in gaining market share on back of better versatile products. Their investment in technology has made them stand-out in comparison to the incumbent public sector players. Axis Bank, in fiscal 2020, successfully managed to raise Rs. 12,500 Crs of capital through one of the largest ever QIP issues by any private sector issuer which strengthened the Bank’s capital ratios taking the total adequacy to 17.53% and CET1 ratio to 13.34%.
In addition to QIP, the bank has received board approval to raise Rs. 15,000 Crs from equity sale. The provision coverage has increased to 69% and the bank holds additional provision of Rs. 5,983 Crs towards various contingencies. In a bid to gain traction in life insurance sector, Axis Bank has entered into agreement with Max Financials, which post transaction turn into 70:30 JV in Max Life Insurance. The bank managed to deliver credit growth at 15.50% YoY which was above industry growth rate with major traction towards retail book. Deposit book increased by 16.70% YoY which was led by strong accretion in term deposit growth making CASA ratio stable at 41%. Currently, Axis Bank has highest exposure i.e. 9.21% from financial companies and of which 60% is towards NBFCs and HFCs. However, given moderation in slippages in corporate segment, incremental lending to ‘A and above’ corporates along with outstanding provision of around Rs. 5,900 Crs provides decent comfort in management ability to steer through the crisis.
ICICI Bank is strategically well placed as it has managed to raise approx. Rs. 3,100 Crs from stake sales in ICICI General Insurance and ICICI Prudential Life Insurance. The bank has also received board approval to raise Rs. 15,000 Crs from equity sale. This has certainly bolstered its already robust capital base which may act as a shock absorber for any provision for COVID-19. CASA ratio of the bank stood at 45.10% and granularity in deposit (57% of deposit from retail and small business customer) suggests lucrative deposit franchise. During these times of uncertainty, ICICI Bank has a lower risk from SME and unsecured businesses on back of lower share in loans and focus on prime-retail as well as better-SME client with net NPA of 1.41%. Bank was also one of the prime beneficiaries of retail as well as commercial deposit migration to larger banks.
IndusInd Bank in the year 2019 merged with Bharat Financial Inclusion making it a perfect fit to the Bank’s rural banking and microfinance theme. Backed by solid domain knowledge and coverage, the Bank is able to make huge strides in vehicle financing. It has managed to contain and reduce its bad loans over a period of years along with consistent double digit growth in profitability and net interest income.
IndusInd Bank is focused on increasing retail lending, reduce dependency of large deposits from government & corporates and maintain sustainable liquidity under the newly appointed MD & CEO Mr. Sumant Kathpalia. Bank’s CASA ratio is the fourth best at 40% among private sector bank in India. Its provision coverage ratio of 63% helps the bank withstand shocks arising out of the COVID-19 pandemic. After the Yes Bank saga, IndusInd Bank witnessed migration of large deposits from government & corporates to larger bank and reported 3% YoY growth in deposit base. Bank has managed maintain their NIM’s at 3.40% with lower pace of NPA formation (i.e. NNPA at 0.91%).
Bandhan Bank commenced its operations as a NGO to cater to microfinance activities in 2001. Bank, over the years, focused on serving the unbanked and under-banked population of India. It has managed to offer regular banking services, microfinance, MSME, and affordable housing finance to urban, semi-urban and rural customers. The bank is a sheer outlier in the banking segment by asset quality, loyal customer base, strong capitalization and highly experienced management team catering to rural areas to bank the unbanked population. In order to couple the stellar organic growth with inorganic growth opportunities, the bank completed its merger with Gruh Finance which would help to foray into the affordable housing segment in India.
Net interest income has grown at a CAGR of around 40% in the last 3 years and profit after tax has grown at a CAGR of around 30% in the last 3 years. Bandhan Bank being focused on under-banked and un-banked population has high exposure close to 64% in micro loans segment of overall loans with share 81% of micro advances in east and north east region. Bank, with this concentration, business-wise as well as region-wise, makes them highly dependent on performance of one single business segment and single region. However, due to their strong liability franchise, deep customer connect (50% exclusive borrowers, 80% borrowers served by bank and one other lender), high customer vintage (50% borrowers are more than 4 years vintage) and long lasting track record makes Bandhan Bank a strong contender for growth in Indian banking space.
City Union Bank is a mid-sized private sector bank with string presence in South India which has consistently achieved healthy growth despite various challenges faced by the industry. City Union Bank being a mid-sized bank stands out amongst peers. Bank operates with a total of 700 branches across India. 628 branches are located in South India out of which 485 branches are in Tamil Nadu. This bank has managed to achieve growth of low double digit in net interest income and has managed to maintain NIMs at 3.98% with Net NPA at 2.29%. Bank’s return on asset stood at 1% and return on equity stood at 9.47% as on March 31, 2020.
Given the healthy performance of the bank over years, one cannot ignore muted loan growth as well as slow down in deposit growth. Further, recently management has indicated potential stressed sectors namely hotels, lease rental discounting, commercial real estate, etc. which accounts for approx. 10% of its portfolio and a portion of which may slip into NPA. It is expected that elevated NPA formation may still weighs margins in near term. The banks has majority of exposure (i.e. approx. 18%) comes from textile, metals and paper products industry and any economic down-turn in these industries may create pressure on asset quality. However, it is expected from past experience that given the backing of experienced and robust management the bank would be able to sail through these uncertain times.
Watch our video on how to analyse and pick Bank Stocks for investments
The Impact of COVID-19 on the Banking Sector
COVID-19 has raised doubts on the banking sector’s ability to grow strongly with sound asset quality for the near term. Recently, prudent banks are preparing for an unforeseen rise in NPA which has kept provisions elevated impacting profitability and in the effort to be proactive many have already raised buffer capital. The already lagging economy kept business growth muted and this got further accentuated by lockdowns. Moratorium by RBI has certainly kept asset quality stable though revival in repayment when the moratorium ends remains an overhang. Moratorium is expected to create a new cycle of bad loans in the entire banking industry.
The sector as whole is likely to witness new NPLs especially from industries like airlines, hotels, entertainment, leveraged corporates in real estate, power, NBFCs as well as unsecured retails to an extent. Hence, the process of recovery could certainly be delayed. However, in order to provide further support to the borrowers, RBI is mulling a one-time loan restructuring scheme. But how that works and how many borrowers repay their loans only time will tell. The possibility of defaults will certainly pressurise this sector as a whole but the moat and ALM experience that each of them carry will certainly enable growth over the long term.
In order to get an exposure to best Indian banking stocks, you would need a total of Rs. 14,321.10 for the below curated portfolio as of July 03, 2020.
|Company Name||Weightage||CMP (as on July 03, 2020)||Quantity||Total (Rs.)|
|HDFC Bank Ltd.||30%||1074.2||4||4,296.8|
|Kotak Mahindra Bank Ltd.||38%||1353.5||4||5,414.0|
|ICICI Bank Ltd.||10%||361.0||4||1,444.0|
|Axis Bank Ltd.||12%||428.5||4||1,714.0|
|Bandhan Bank Ltd.||2%||346.3||1||346.3|
|IndusInd Bank Ltd.||3%||487.3||1||487.3|
|City Union Bank Ltd.||4%||123.8||5||618.8|
Detailed table with various parameters for Best Banking Stocks in IndiaBest Bank Stocks to Buy now in India
|Sr. No.||Company Name||BSE Scrip Code||NSE Symbol||CMP (as on July 03, 2020)||Rating||Industry||Market Cap||Price to Book (times)||Return on Equity (%)||Return on Assets (%)||Net Interest Margin (%)||GNPA%||NNPA%||CASA Ratio (%)||NII (3 years CAGR)||PAT (3 years CAGR)||CRAR||Deposits Growth (%)||Advances Growth (%)||Provision Coverage Ratio (%)||Cost to income ratio (%)|
|1||HDFC Bank Ltd.||500180||HDFCBANK||1074.2||4.5||Bank – Private||5,98,275.65||3.39||16.54%||1.90%||3.95%||1.26%||0.36%||42.19%||12%||14%||18.50%||24.25%||20.07%||72.00%||39.00%|
|2||Kotak Mahindra Bank Ltd.||500247||KOTAKBANK||1353.5||4.0||Bank – Private||2,67,465.00||3.61||13.84%||2.05%||4.13%||2.25%||0.71%||56.36%||12%||12%||19.80%||15.82%||2.64%||76.30%||47.00%|
|3||ICICI Bank Ltd.||532174||ICICIBANK||361||4.0||Bank – Private||2,34,882.96||1.96||5.20%||0.48%||2.90%||5.53%||1.41%||45.10%||13%||7%||16.11%||17.53%||9.16%||75.70%||43.90%|
|4||Axis Bank Ltd.||532215||AXISBANK||428.5||4.0||Bank – Private||1,19,526.76||1.38||7.65%||0.67%||2.96%||4.86%||1.56%||41.01%||11%||59%||17.53%||16.60%||15.06%||69.00%||42.95%|
|5||Bandhan Bank Ltd.||541153||BANDHANBNK||346.3||4.0||Bank – Private||55,731.77||3.67||18.96%||3.87%||8.10%||1.48%||0.58%||36.80%||28%||31%||27.43%||32.04%||68.07%||60.80%||30.30%|
|6||IDBI Bank Ltd.||500116||IDBI||50.6||0.5||Bank – Private||50,034.46||1.77||-67.94%||-4.47%||2.27%||27.53%||4.19%||47.74%||7%||N.A.||13.31%||-2.18%||-11.55%||93.74%||57.04%|
|7||IndusInd Bank Ltd.||532187||INDUSINDBK||487.25||4.0||Bank – Private||34,307.24||1.02||13.28%||1.32%||3.40%||2.45%||0.91%||40.37%||17%||7%||15.04%||3.67%||10.94%||63.00%||42.90%|
|8||Yes Bank Ltd.||532648||YESBANK||26.15||0.5||Bank – Private||33,007.74||1.52||6.49%||0.49%||2.74%||16.80%||5.03%||26.60%||-4%||N.A.||8.50%||-53.72%||-28.98%||73.80%||94.30%|
|9||IDFC First Bank Ltd.||539437||IDFCFIRSTB||26.8||0.5||Bank – Private||15,201.88||0.87||-11.23%||-1.28%||2.25%||2.60%||0.94%||31.87%||45%||N.A.||13.38%||-7.50%||-0.82%||64.53%||76.54%|
|10||The Federal Bank Ltd.||500469||FEDERALBNK||53||2.0||Bank – Private||10,676.50||0.72||10.97%||0.90%||2.83%||2.84%||1.31%||30.50%||10%||20%||14.35%||12.88%||11.94%||72.48%||50.22%|
|11||City Union Bank Ltd.||532210||CUB||123.75||4.5||Bank – Private||9,215.32||1.74||15.17%||1.60%||3.72%||4.09%||2.29%||24.97%||5%||-7%||16.76%||6.20%||3.84%||65.00%||44.04%|
|12||RBL Bank Ltd.||540065||RBLBANK||173.5||2.0||Bank – Private||9,027.59||0.85||5.53%||0.59%||4.59%||3.62%||2.07%||29.60%||29%||-8%||16.40%||-0.93%||6.81%||64.00%||49.70%|
|13||State Bank of India||500112||SBIN||184.75||1.0||Bank – Public||1,65,506.92||0.73||8.32%||0.45%||2.82%||6.15%||2.23%||44.17%||10%||N.A.||13.06%||11.35%||6.62%||83.62%||52.46%|
|14||Punjab National Bank||532461||PNB||35.95||0.5||Bank – Public||34,113.53||0.78||-25.24%||-1.28%||2.33%||14.21%||5.78%||44.05%||6%||N.A.||14.14%||4.16%||3.12%||77.79%||45.44%|
|15||Bank of Baroda||532134||BANKBARODA||50.75||1.0||Bank – Public||23,772.82||0.34||2.25%||0.14%||2.62%||9.40%||3.13%||39.10%||20%||N.A.||13.87%||46.22%||45.91%||81.33%||47.86%|
|16||Union Bank||532477||UNIONBANK||32.05||0.5||Bank – Public||20,758.18||0.62||-12.38%||-0.59%||2.21%||14.15%||5.49%||35.60%||7%||N.A.||12.81%||8.37%||6.32%||66.24%||45.80%|
|17||Indian Overseas Bank||532388||IOB||11.13||0.5||Bank – Public||18,935.41||1.40||-29.85%||-2.95%||2.29%||14.78%||5.44%||40.26%||-1%||N.A.||10.72%||0.19%||-8.50%||86.94%||54.43%|
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