Last Updated – December 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 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).
Summary of Best Banks to Buy now in India
|Sr. No.||Company Name||BSE Scrip Code||NSE Symbol||CMP (as of December 04, 2020)||Rating||Industry|
|1||HDFC Bank Ltd.||500180||HDFCBANK||1385.2||4.0||Bank – Private|
|2||Kotak Mahindra Bank Ltd.||500247||KOTAKBANK||1845.9||4.0||Bank – Private|
|3||ICICI Bank Ltd.||532174||ICICIBANK||502.1||3.0||Bank – Private|
|4||Axis Bank Ltd.||532215||AXISBANK||614.6||2.0||Bank – Private|
|5||Bandhan Bank Ltd.||541153||BANDHANBNK||393.3||5.0||Bank – Private|
|6||IDBI Bank Ltd.||500116||IDBI||39.7||0.5||Bank – Private|
|7||IndusInd Bank Ltd.||532187||INDUSINDBK||913.6||4.0||Bank – Private|
|8||Yes Bank Ltd.||532648||YESBANK||15.3||0.5||Bank – Private|
|9||IDFC First Bank Ltd.||539437||IDFCFIRSTB||37.1||0.5||Bank – Private|
|10||The Federal Bank Ltd.||500469||FEDERALBNK||66.0||2.0||Bank – Private|
|11||City Union Bank Ltd.||532210||CUB||179.7||4.0||Bank – Private|
|12||RBL Bank Ltd.||540065||RBLBANK||237.2||1.0||Bank – Private|
|13||State Bank of India||500112||SBIN||263.5||1.0||Bank – Public|
|14||Punjab National Bank||532461||PNB||35.7||0.5||Bank – Public|
|15||Bank of Baroda||532134||BANKBARODA||59.1||0.5||Bank – Public|
|16||Union Bank||532477||UNIONBANK||31.2||0.5||Bank – Public|
|17||Indian Overseas Bank||532388||IOB||11.03||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 (0.30-0.40% 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 are 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 the total loan portfolio in unsecured loans and this has constantly aided its growth. Given the unprecedented impact by the COVID-19 situation on varied businesses, its unsecured portfolio performance may get severely impacted and needs to be given a closer look. HDFC Bank is aware of this took a pragmatic approach and from FY2019-20 shifted to focus on the 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 a prudent and cautious approach, targeting only high-rated customers and sectors. This aided the bank’s low levels of bad loan formation over the years (Net NPA at 0.70%). This banking behemoth has managed to achieve NIM and profit 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 an industry-leading CASA ratio of 57.10%. 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 40%. 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.
Axis Bank is third-largest bank in the private sector banking space with a total asset size of Rs.9,07,910 Crs as on March 31, 2020, registering a 14% CAGR over 5 years ended financial year ended 2020. The private sector player has maintained healthy capitalization levels and demonstrated strong capital ability to raise capital to fund growth and maintain cushion over minimum regulatory requirement as well as strong ability to raise resources by way of deposits and bonds. Axis Bank’s total deposits grew by 16.71% and stood at Rs. 640,105 Crs as on March 31, 2020. The bank has a sizable CASA deposit base which constituted around 39% of total deposits as on September 30, 2020. As of the quarter ended September 30, 2020, it has been able to contain the formation of bad loans and has reported Gross NPA ratio of 4.18% and Net NPA ratio of 0.98%. The overall additional provisions held towards various contingencies together with the standard asset provisions translate to standard asset coverage of 2.20% as of September 30, 2020. On an aggregated basis, the provision coverage ratio (including specific + standard + additional + Covid provisions) stands at 124% of GNPA as on September 30, 2020. Its capital adequacy ratio stands robust at 19.38% with a CET1 ratio of 15.38%. Currently, Axis Bank has the highest exposure i.e. 11.99% from financial companies and of which 57% is towards NBFCs and HFCs. The exposure towards NBFCs and HFCs can pose a risk to the lender during these uncertain times of COVID-19.
ICICI Bank along with above mentioned private sector lenders have been successful in gaining market share on the back of better versatile products. Their investment in technology has made them stand-out in comparison to the incumbent public sector players. ICICI Bank is the second-largest private sector bank in India in terms of asset size and is designated as one of the Domestic Systemically Important Banks (D-SIB) in the country. Total balance sheet size of the bank on a standalone basis stood at Rs.10,98,365 Crs as on March 31, 2020. Bank managed to report Capital Adequacy Ratio (CAR) (under Basel III) of 16.11% with Tier I CAR of 14.72% and Common Equity Tier I (CET I) Ratio of 13.39% as on March 31, 2020. Private lender’s robust retail franchise helps in the mobilization of low-cost deposits and has helped the bank in consistently maintaining a healthy CASA mix of 40.30% as on September 30, 2020. It managed to restrict bad loan formation and reported Gross NPA ratio of 5.17% and Net NPA ratio of 1.00% as on September 30, 2020. In the background of the impact of Covid-19 and overall slowdown due to lockdowns implemented across countries, the asset quality of the bank would be a key monitorable.
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 the fourth-best at 40% among private sector banks in India. Its provision coverage ratio of 77% 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 10% YoY growth in deposit base. Bank has managed maintain their NIM’s at 4.16% with lower pace of NPA formation (i.e. NNPA at 0.52%).
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 the under-banked and unbanked population has high exposure close to 64% in micro loans segment of overall loans with share 81% of micro advances in the east and northeast 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 make 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 700 branches across India. 628 branches are located in South India out of which 485 branches are in Tamil Nadu. It has managed to achieve growth of low double-digit in net interest income and has maintained NIMs at 4.12% with Net NPA at 1.81%. CUB’s return on asset stood at 1% and return on equity stood at 9.40% as on September 30, 2020. 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 approx. 10% 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. 17%) 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 exposure to best Indian banking stocks, you would need a total of Rs. 19,595.70 for the below curated portfolio as of December 04, 2020.
|Company Name||Weightage||CMP (as of December 04, 2020)||Quantity||Total (Rs.)|
|HDFC Bank Ltd.||28%||1385.2||4||5,540.6|
|Kotak Mahindra Bank Ltd.||38%||1845.9||4||7,383.6|
|ICICI Bank Ltd.||10%||502.1||4||2,008.2|
|Axis Bank Ltd.||13%||614.6||4||2,458.2|
|Bandhan Bank Ltd.||2%||393.3||1||393.3|
|IndusInd Bank Ltd.||5%||913.6||1||913.6|
|City Union Bank Ltd.||5%||179.7||5||898.3|
Detailed table with various parameters for Best Bank Stocks to Buy now in India
|Sr. No.||Company Name||BSE Scrip Code||NSE Symbol||CMP (as on December 04, 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||1385.15||4.0||Bank – Private||762,747.4||3.97||16.54%||1.99%||4.10%||1.08%||0.17%||41.60%||12%||14%||19.10%||20.32%||14.94%||84.50%||36.80%|
|2||Kotak Mahindra Bank Ltd.||500247||KOTAKBANK||1845.9||4.0||Bank – Private||365,448.4||4.63||13.84%||2.14%||4.58%||2.55%||0.70%||57.10%||12%||12%||24.50%||12.31%||-6.52%||75.60%||47.00%|
|3||ICICI Bank Ltd.||532174||ICICIBANK||502.05||3.0||Bank – Private||346,503.5||2.43||5.20%||0.91%||3.57%||5.17%||1.00%||40.30%||13%||7%||18.47%||18.96%||5.61%||81.50%||39.22%|
|4||Axis Bank Ltd.||532215||AXISBANK||614.55||2.0||Bank – Private||188,111.7||1.9||7.65%||0.23%||3.58%||4.18%||0.98%||39.00%||11%||59%||19.38%||8.60%||9.81%||77.00%||42.95%|
|5||Bandhan Bank Ltd.||541153||BANDHANBNK||393.25||5.0||Bank – Private||63,327.9||3.80||18.96%||4.21%||8.00%||1.20%||0.40%||38.20%||28%||31%||25.70%||34.42%||22.62%||60.80%||29.40%|
|6||IDBI Bank Ltd.||500116||IDBI||39.7||0.5||Bank – Private||41,211.0||1.43||-67.94%||-4.24%||2.76%||25.08%||2.67%||48.33%||7%||N.A.||13.67%||-3.44%||-4.98%||95.96%||53.60%|
|7||IndusInd Bank Ltd.||532187||INDUSINDBK||913.6||4.0||Bank – Private||69,154.2||1.79||13.28%||1.56%||4.16%||2.21%||0.52%||40.30%||17%||7%||16.55%||9.99%||2.10%||77.00%||40.98%|
|8||Yes Bank Ltd.||532648||YESBANK||15.33||0.5||Bank – Private||38,409.2||1.05||6.49%||-5.44%||3.10%||16.90%||4.71%||24.80%||-4%||N.A.||19.90%||-35.19%||-25.61%||75.70%||49.30%|
|9||IDFC First Bank Ltd.||539437||IDFCFIRSTB||37.1||0.5||Bank – Private||21,044.6||1.19||-11.23%||-1.92%||4.57%||1.62%||0.43%||40.37%||45%||N.A.||14.73%||9.39%||4.74%||74.00%||68.72%|
|10||The Federal Bank Ltd.||500469||FEDERALBNK||66||2.0||Bank – Private||13,171.8||0.85||10.97%||0.94%||3.13%||2.84%||0.99%||33.68%||10%||20%||14.64%||12.16%||7.11%||64.65%||46.72%|
|11||City Union Bank Ltd.||532210||CUB||179.65||4.0||Bank – Private||13,265.4||2.38||15.17%||1.04%||4.12%||3.44%||1.81%||25.70%||5%||-7%||17.36%||2.40%||6.30%||70.00%||40.31%|
|12||RBL Bank Ltd.||540065||RBLBANK||237.2||1.0||Bank – Private||14,175.7||1.14||5.53%||0.62%||4.30%||3.34%||1.38%||31.10%||29%||-8%||16.50%||2.59%||-3.95%||74.75%||48.20%|
|13||State Bank of India||500112||SBIN||263.45||1.0||Bank – Public||235,118.9||0.97||8.32%||0.45%||3.12%||5.28%||1.59%||45.39%||10%||N.A.||14.72%||14.39%||6.87%||88.19%||55.16%|
|14||Punjab National Bank||532461||PNB||35.65||0.5||Bank – Public||33,548.9||0.4||0.72%||0.05%||3.21%||13.43%||4.75%||44.10%||6%||N.A.||12.84%||53.47%||52.05%||83.00%||47.83%|
|15||Bank of Baroda||532134||BANKBARODA||59.05||0.5||Bank – Public||27,284.5||0.35||1.49%||0.10%||2.86%||9.14%||2.51%||39.78%||20%||N.A.||13.26%||6.53%||5.15%||85.35%||46.10%|
|16||Union Bank||532477||UNIONBANK||31.15||0.5||Bank – Public||19,957.3||0.34||-11.02%||-0.61%||2.51%||14.71%||4.13%||34.60%||7%||N.A.||12.38%||99.74%||93.76%||83.16%||44.95%|
|17||Indian Overseas Bank||532388||IOB||11.03||0.5||Bank – Public||18,130.0||1.29||-61.57%||-3.49%||2.27%||13.04%||4.30%||40.26%||-1%||N.A.||10.90%||3.31%||-3.11%||89.36%||48.80%|
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