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In this article, we will discuss

• Importance of the Banking sector in India
• List of Best Banking Stocks to Buy now in India
• The Impact of COVID-19 on the Banking Sector
• Model Portfolio
• A detailed table with various parameters for Best Bank Stocks 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). Prime Minister Narendra Modi set a USD 5Tn economy target for India Inc. which is to be achieved by FY24. This target will not be able to achieve without the assistance of a strong banking industry and a healthy growth in credit.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).Loving the valuable content? Invite friends to Samco to explore our informative blogs. Earn voucher rewards for each successful referral. Start referring now and reap the rewards

List of Best Banking Stocks to Buy now in India

Sr no.	Company name	BSE Scrip Code	NSE Symbol	CMP - 29/05/2023	Ratings	Industry
1	AU Small Finance Bank Ltd.	540611	AUBANK	790.4	4.5	Bank - Private
2	Axis Bank Ltd.	532215	AXISBANK	929.2	2	Bank - Private
3	Bandhan Bank Ltd.	541153	BANDHANBNK	263.95	4	Bank - Private
4	Bank Of Baroda	532134	BANKBARODA	183.65	0.5	Bank - Public
5	HDFC Bank Ltd.	500180	HDFCBANK	1634.85	4.5	Bank - Private
6	ICICI Bank Ltd.	532174	ICICIBANK	947.85	4	Bank - Private
7	IDFC First Bank Ltd.	539437	IDFCFIRSTB	70.17	0.5	Bank - Private
8	IndusInd Bank Ltd.	532187	INDUSINDBK	1284.65	3	Bank - Private
9	Kotak Mahindra Bank Ltd.	500247	KOTAKBANK	1952.9	4	Bank - Private
10	Punjab National Bank	532461	PNB	50.81	0.5	Bank - Public
11	State Bank Of India	500112	SBIN	594.95	0.5	Bank - Public
12	The Federal Bank Ltd.	500469	FEDERALBNK	125.45	1	Bank - Private

HDFC Bank

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 1,710 branches and 2,802 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 0.37% in Q4FY23). This banking behemoth has managed to achieve NII and profit growth of 35% and 26.3% YoY in Q4FY23. Bank’s deposit franchise continues to be granular and robust with deposit accretion staying healthy with an industry-leading CASA ratio of 52.8%.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 58%. The business has a healthy asset under management of Rs. 3,82,504 crs for FY22.Digitalization is the backbone of the bank’s growth strategy and the company has been investing and enhancing its technology armor. The future growth is expected to be boosted by expanding distribution, deeper channel and robust digital infrastructure. The bank has proven its stable leadership, strong liability franchise, best-in-class margins and cautious underwriting measures.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

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 4.9%. This in turn has resulted in an improved Return on Equity (ROE) of 18.9% 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

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.The banking sector is standing at the cusp of a broad-based credit up-cycle and the tailwinds are coming in from all directions. The System credit growth has been in double digits since July 2022 and the momentum is expected to sustain. The retail loan book has been growing strong and the growth in corporates are also showing signs of revival. The asset quality of the banks is in their best shape in a decade and thus the provisioning has reduced. This is aiding the net profits of banks. The increasing repo rates by the RBI in order to control the inflation has aided the margins in the past year. Quality banks with clean balance sheets are expected to continue to do well.

IndusInd Bank

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

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.

Model Portfolio

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 29 May, 2023)	Quantity	Total (Rs.)
HDFC Bank	31%	1634.85	4	6539.4
Kotak Mahindra Bank	19%	1952.9	2	3905.8
ICICI Bank	27%	947.85	6	5687.1
Axis Bank	22%	929.2	5	4646
	100%		Total	20778.3

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 - 29/05/2023	Ratings	Industry	Market Cap	P/B	ROE	ROA	NIM	GNPA	NNPA	Q4FY22	Q4FY23	YoY Growth	FY21	FY22	YoY Growth	FY21	FY22	YoY growth
1	AU Small Finance Bank Ltd.	540611	AUBANK	790.4	4.5	Bank - Private	38595	5.3	16.6	1.9	5.7	2	2	346	425	23%	34609	46095	33%	35979	52584.6206	46%
2	Axis Bank Ltd.	532215	AXISBANK	929.2	2	Bank - Private	264132	2.0	12.0	1.2	3.5	2.8	2.8	4118	-5728	-239%	614399	707696	15%	697985	821720.9051	18%
3	Bandhan Bank Ltd.	541153	BANDHANBNK	263.95	4	Bank - Private	31524	2.8	0.7	0.1	8.2	6.5	6.5	1902	808	-58%	81613	93975	15%	77972	96330.6131	24%
4	Bank Of Baroda	532134	BANKBARODA	183.65	0.5	Bank - Public	87293	0.7	8.9	0.6	3.0	6.6	6.6	1779	4775	168%	706301	777155	10%	966997	1045938.56	8%
5	HDFC Bank Ltd.	500180	HDFCBANK	1634.85	4.5	Bank - Private	898199	3.4	16.7	1.9	4.0	1.2	1.2	10055	12047	20%	1132837	1368821	21%	1335060	1559217.44	17%
6	ICICI Bank Ltd.	532174	ICICIBANK	947.85	4	Bank - Private	612533	3.0	15.0	1.8	4.0	3.8	3.8	7019	9122	30%	733729	859020	17%	932522	1064571.613	14%
7	IDFC First Bank Ltd.	539437	IDFCFIRSTB	70.17	0.5	Bank - Private	36413	1.2	0.8	0.1	6.0	3.7	3.7	343	803	134%	100550	117858	17%	88688	105634.3638	19%
8	IndusInd Bank Ltd.	532187	INDUSINDBK	1284.65	3	Bank - Private	82877	1.5	10.2	1.2	4.1	2.3	2.3	1361	2041	50%	212595	239052	12%	256205	293681.3488	15%
9	Kotak Mahindra Bank Ltd.	500247	KOTAKBANK	1952.9	4	Bank - Private	344370	4.8	12.7	2.1	4.6	2.3	2.3	2767	3496	26%	223670	271254	21%	280100	311684.1134	11%
10	Punjab National Bank	532461	PNB	50.81	0.5	Bank - Public	51432	0.4	4.0	0.3	2.7	11.8	11.8	202	1159	475%	674230	728186	8%	1106332	1146218.45	4%
11	State Bank Of India	500112	SBIN	594.95	0.5	Bank - Public	467382	1.7	13.0	0.7	3.1	4.0	4.0	9114	16695	83%	2449498	2733967	12%	3681277	4051534.123	10%
12	The Federal Bank Ltd.	500469	FEDERALBNK	125.45	1	Bank - Private	27987	1.1	10.8	0.9	3.2	2.8	2.8	541	903	67%	131879	144928	10%	172644	181700.5861	5%

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