Last Updated – Dec 2022
In this article, we will cover
– Importance of the Banking sector in India
– List of best banking stocks to buy
– video on how to analyse and pick Banking Stocks
– A model portfolio to gain exposure to the best banking stocks in India
– 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 the 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).
List of Best Banking Stocks to Buy now in India
|Sr. No.||Company Name||BSE Scrip Code||NSE Symbol||CMP (18 Dec, 2022)||Rating||Industry|
|1||HDFC Bank Ltd.||500180||HDFCBANK||1639.65||4.5||Bank – Private|
|2||Kotak Mahindra Bank Ltd.||500247||KOTAKBANK||1840.55||4.0||Bank – Private|
|3||ICICI Bank Ltd.||532174||ICICIBANK||902.00||4.0||Bank – Private|
|4||Axis Bank Ltd.||532215||AXISBANK||935.10||2.0||Bank – Private|
|5||Bandhan Bank Ltd.||541153||BANDHANBNK||247.30||4.0||Bank – Private|
|6||IDBI Bank Ltd.||500116||IDBI||57.20||0.5||Bank – Private|
|7||IndusInd Bank Ltd.||532187||INDUSINDBK||1229.55||3.0||Bank – Private|
|8||Yes Bank Ltd.||532648||YESBANK||311.00||0.5||Bank – Private|
|9||IDFC First Bank Ltd.||539437||IDFCFIRSTB||61.95||0.5||Bank – Private|
|10||The Federal Bank Ltd.||500469||FEDERALBNK||136.05||1.0||Bank – Private|
|11||City Union Bank Ltd.||532210||CUB||190.20||3.0||Bank – Private|
|12||RBL Bank Ltd.||540065||RBLBANK||164.80||1.0||Bank – Private|
|13||State Bank of India||500112||SBIN||603.35||0.5||Bank – Public|
|14||Punjab National Bank||532461||PNB||56.75||0.5||Bank – Public|
|15||Bank of Baroda||532134||BANKBARODA||182.00||0.5||Bank – Public|
|16||Union Bank||532477||UNIONBANK||84.70||0.5||Bank – Public|
HDFC Bank is one of India’s top private sector banks. As of March 31, 2022, the bank’s consolidated total asset was at INR 21.2 lakh crore. In India, the bank operates 6,342 branches and 18,130 ATMs.
The bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its group companies.
HDFC Bank has long been regarded as a benchmark in the banking industry. Despite RBI-induced credit card market share losses and investor concerns about changes in top leadership, HDFC Bank is a rock-solid high-growth banking brand with excellent asset quality and best-in-class return ratios.
Despite the sheer size of the bank, it has consistently delivered astonishing loan book growth and has gained market share. Its loan book has increased at a CAGR of 20% in the past five years. This phenomenal rise has not come at the expense of poor asset quality. This is visible from its GNPAs which have remained best-in-class and have been in the range of 1.2 to 1.4% in the past five years.
With the Pandemic behind us, the bank has stated its intention in ramping up its retail loan book. The bank seems to be on the right track as in the latest quarter the bank witnessed its retail book growing at a healthy speed of 22% YoY, while its corporate book growth moderated to 20% YoY. Post the merger, the mighty mortgage portfolio of HDFC ltd will further enhance the retail book of HDFC Bank.
The Bank has been on an accelerated growth journey driven by strong advances and is now expected to be led by retail and MSMEs. The bank has also been continuously building up its branch network and digital capabilities which are expected to bore fruits going ahead.
Kotak Mahindra Bank
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 1,600+ branches and 2,600+ ATMs across India. This banking behemoth has managed to achieve profit CAGR of 19.6% in 5 years and has managed to grow advances at 20%+ in past three quarters. Bank’s deposit franchise continues to be granular and robust with deposit accretion staying healthy with an industry leading CASA ratio of 56.20% in Q4FY22. Kotak Bank has maintained its cautious stance towards unsecured retail, credit cards and small business lending. Bank’s 70% advances are given to corporate and business, home loans & LAP and agriculture segment, with corporate and business division having the highest exposure of nearly 25%. Uday Kotak in his recent comments has highlighted management’s intent to be more aggressive and concentrate on the asset side with higher customer acquisition, deepening relationships and cross selling. The bank has proven its stable leadership, strong liability franchise, best-in-class margins and cautious underwriting measures.
ICICI Bank is one of India’s top private sector banks. As of March 31, 2022, the bank’s consolidated total asset was at INR 17.5 lakh crore. In India, the bank operates 5,418 branches and 13,626 ATMs.
The bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its group companies.
Post the joining of Mr. Sandeep Bakshi in Oct’18, the bank has been on a transformational journey. The bank has significantly improved its underwriting practices and it is clearly visible from its improving asset quality numbers. The bank’s GNPAs stood at 8.84% in FY18 and now stand at 3.8% as on FY22.
ICICI Bank has altered itself from a corporate-focused bank to a retail bank in the last 6 years. This would result in a sustainable lower risk high yielding lending book. The bank’s retail share has increased to 62% in FY22 from 37% in FY13.
The bank’s Net Interest Margin (NIM) has been on a consistent rise thanks to its change in loan mix and steady fall in its non-performing assets. Over the last three years, the bank’s NIM improved from 3.19% to 4%. This in turn has resulted in an improved Return on Equity (ROE) of 15% from 8.8% in FY21.
The banking sector seems to be coming out of the woods with Industry credit growth picking up pace at 9.6% in FY22. ICICI Bank being one of the biggest banks in India is bound to be a key beneficiary of demand pick-up. This was visible in its strong credit growth of 18% in FY22.
Axis Bank is the third largest private sector bank in India. As of March 31, 2022, the bank’s total asset was at INR 11.75 lakh crore. In India, the bank operates 4,758 branches and 16,900+ ATMs and Cash deposits/Withdrawal machines.
The bank offers a wide range of banking products and financial services to retail and commercial and wholesale customers through a variety of delivery channels.
Mr. Amitabh Chaudhry joined Axis Bank as MD and CEO in January 2019, after heading HDFC Life for nine years. He joined at a time when the bank was facing a lot of legacy issues. He brought in new hunger within the bank and had a two-eyed focus both on growth and asset quality issues. A series of acquisitions, capped by Axis’s USD 1.64 billion buyouts of Citi’s consumer business is a testimony of new-found aggression. When he joined the bank’s Gross non-performing assets stood at 5.77% while they now stand at 2.82% which is a testimony to cleaning the bank’s legacy issues.
The Bank’s financial performance has been improving quarter by quarter. The bank’s total assets stood at INR ~7,60,000 IN March 2019, while in March 2022 it stood at INR 11,75,178 crores growing at a CAGR of ~16%. The return on assets of the bank improved to 1.46% from 0.88%, while its Return on Equity improved to 15.87% from 11.33%. The bank appears to be on track to fulfill its ROE target of 18%. The bank’s retail portfolio has witnessed significant improvement which has been the management’s focus in the past three years reaching 56.5% from 49%. Owing to low GNPAs and adequate provisioning the NNPA of the bank currently stands at 0.73% vs 2.36% three years ago.
Axis Bank has demonstrated improvement in its asset quality, NIM, and Profitability in the past few years. The bank has also changed gears in building digital infrastructure and has made investments in the same. The bank’s ongoing efforts to expand its asset portfolio in a targeted way (retail loans make up 57% of the total book) focus on the mobilization of low-cost granular deposits, declining credit costs, margin expansion, and an improved return ratios matrix are encouraging signs for future growth in earnings.
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, reducing dependency of large deposits from government & corporates and maintaining sustainable liquidity under the newly appointed MD & CEO Mr. Sumant Kathpalia. Bank’s CASA ratio is at 41.8% one of the best among private sector banks in India. Its provision coverage ratio of 72.3% 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 banks, however, it did manage to bring the migrated deposit reporting 15% YoY growth in deposit base. Bank has managed maintain their NIM’s at 4.2% with lower pace of NPA formation (i.e. NNPA at 0.64%).
Bandhan Bank commenced its operations as an 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 23.5% in the last 5 years. Bandhan Bank being focused on under-banked and unbanked population has high exposure close to 52% in micro loans segment (now Emerging Entrepreneurs Business) of overall loans. With 57% 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
City Union Bank is a mid-sized private sector bank with a strong 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 702 branches across India. 630 branches are located in South India out of which 486 branches are in Tamil Nadu. It has managed to achieve low double digits in net interest income and has maintained NIMs at 4.01% with Net NPA at 2.95%. CUB’s return on asset stood at 1.43% and return on equity stood at 13% as on March 31, 2022. Given its healthy performance 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 miniscule portion of its portfolio and a portion of which may slip into NPA. It is expected that elevated NPA formation may still weigh-on margins in the near term. The bank’s majority of exposure (i.e. approx. 10%) 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.
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, banks have provided 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 pressurize this sector as a whole but the moat and ALM experience that each of them carry will certainly enable growth over the long term.
Watch our video on how to analyse and pick Banking 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, banks have provided 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. 31,408 for the below curated portfolio as of 9 Nov, 2022.
|Company Name||Weightage||CMP (as on 18 Dec, 2022)||Quantity||Total (Rs.)|
|Kotak Mahindra Bank||17%||1840.55||2||3681.1|
|City Union Bank||2%||190.2||2||380.4|
A detailed table with various parameters for Best Bank Stocks to Buy now in India
|Sr. No.||Company Name||BSE Scrip Code||NSE Symbol||CMP (18 Dec, 2022)||Rating||Industry||Market Cap||Price to Book (times)||Return on Equity (%)||Return on Assets (%)||Net Interest Margin (%)||GNPA%||NNPA%||CASA Ratio (%)||NII Growth YoY||PAT Growth YoY||CRAR||Deposits Growth YoY (%)||Advances Growth YoY (%)||Cost to income ratio (%)|
|1||HDFC Bank Ltd.||500180||HDFCBANK||1639.65||4.5||Bank – Private||815166.80||3.40||16.60||1.94||4.10||1.17||0.32||45.40||18.9%||20.1%||18.90%||19%||23%||36.88|
|2||Kotak Mahindra Bank Ltd.||500247||KOTAKBANK||1840.55||4.0||Bank – Private||348248.61||4.84||13.30||2.11||5.17||2.34||0.64||56.20||26.8%||27.0%||22.60%||11%||25%||47.99|
|3||ICICI Bank Ltd.||532174||ICICIBANK||902.00||4.0||Bank – Private||507434.04||3.04||14.80||2.06||4.31||3.76||0.81||46.60||26.5%||37.1%||19.16%||12%||23%||40.52|
|4||Axis Bank Ltd.||532215||AXISBANK||935.10||2.0||Bank – Private||233500.38||2.03||12.70||1.80||4.08||2.82||0.73||46.00||31.1%||70.1%||18.54%||10.1%||17.6%||48.83|
|5||Bandhan Bank Ltd.||541153||BANDHANBNK||247.30||4.0||Bank – Private||49514.94||2.85||0.74||0.15||7.00||6.46||1.66||40.80||13.3%||-107.0%||23.47%||21.3%||21.1%||30.54|
|6||IDBI Bank Ltd.||500116||IDBI||57.20||0.5||Bank – Private||46020.28||1.39||6.32||1.09||4.37||19.14||1.27||56.19||47.7%||46.0%||15.59%||3%||17%||45.89|
|7||IndusInd Bank Ltd.||532187||INDUSINDBK||1229.55||3.0||Bank – Private||72438.76||1.53||10.10||1.78||4.24||2.27||0.64||42.00||17.6%||60.5%||17.38%||15%||18%||42.68|
|8||Canara Bank||532648||YESBANK||311.00||0.5||Bank – Private||41289.61||0.72||9.23||0.79||2.83||7.51||2.65||31.69||18.5%||89.5%||17.50%||9.8%||21.4%||46.16|
|9||IDFC First Bank Ltd.||539437||IDFCFIRSTB||61.95||0.5||Bank – Private||24653.21||1.17||0.70||1.07||5.98||3.70||1.53||51.28||32.1%||266.1%||13.77%||37%||32%||74.60|
|10||The Federal Bank Ltd.||500469||FEDERALBNK||136.05||1.0||Bank – Private||20468.27||1.09||11.00||0.30||3.30||2.80||0.96||36.41||19.1%||52.9%||14.62%||10.0%||20.0%||53.32|
|11||City Union Bank Ltd.||532210||CUB||190.20||3.0||Bank – Private||9544.34||1.45||12.20||1.72||4.02||4.70||2.95||31.30||18.7%||51.8%||19.52%||7.7%||12.9%||40.37|
|12||RBL Bank Ltd.||540065||RBLBANK||164.80||1.0||Bank – Private||7799.67||0.62||-1.32||0.77||4.50||4.40||1.34||36.20||16.3%||554.4%||17.50%||5%||12%||56.88|
|13||State Bank of India||500112||SBIN||603.35||0.5||Bank – Public||440340.36||1.72||12.20||1.04||3.55||3.97||1.02||44.63||12.8%||73.9%||13.74%||10%||21%||57.91|
|14||Punjab National Bank||532461||PNB||56.75||0.5||Bank – Public||38593.61||0.44||4.05||0.12||3.11||11.78||4.80||44.91||30.2%||-62.8%||14.32%||7%||15%||49.38|
|15||Bank of Baroda||532134||BANKBARODA||182.00||0.5||Bank – Public||57712.40||0.67||9.00||1.01||3.41||6.61||1.72||42.77||34.5%||58.7%||14.99%||13.6%||20.6%||49.24|
|16||Union Bank||532477||UNIONBANK||84.70||0.5||Bank – Public||26484.65||0.38||7.78||0.61||3.15||11.11||3.68||35.63||21.6%||21.1%||12.56%||14%||25%||45.74|
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