Best Banking Stocks to Buy now in India 2022

Best Banking Stocks to Buy

The banking industry is the backbone of the economy, which experiences its own ups and downs. When the economy is doing well, lending and borrowing increase, which contributes to strong growth in banks. When things grow tight, defaults rise, resulting in a rise in poor assets (bad loans).

Prime Minister Narendra Modi set a goal for India Inc. to reach a USD 5 trillion GDP during the next five years last year. However, given the multiple hurdles posed by lockdowns and the economic slowdown, bank credit needs grow at a rate of near to 12% per year in order to reach a USD 5 trillion economy by 2024. And these financial institutions have always stayed robust, continually growing through several economic cycles in order to seize every opportunity.

When considering a financials investment, particularly in the banking sector, management’s awareness of the robust growth-risk matrix is critical. A bank should ideally be chosen based on its ability to strike a balance between gaining market share and without distorting the risk matrix in place to do so. The underlying historical performance of the banking players, as well as those players that have managed to show some degree of predictability in their financial performance, should be thoroughly examined.

When investing in banks, investors should analyze profitability growth, the color and growth of advances and deposits, as well as appropriate buffer capital and the trend of non-performing assets and NIM. As a result, one should carefully choose banks that have a matrix such as low net nonperforming assets (i.e. between 0.30 percent and 2%) over time, a strong CASA ratio (current account and savings account ratio) of more than 40%, a sufficient capital buffer in terms of CRAR that is consistently well above RBI standards of 9%, consistent and robust net interest margins (i.e. above 3%), and consistent growth in advances and deposits (nearly above 10-20 percent YoY growth).

List of Best Banking Stocks to Buy now in India

HDFC Bank

HDFC Bank has built an industry-leading position by focusing on every facet of retail banking, including private banking and wealth management, and catering primarily to individuals. While growing business in double digits for years, the bank has maintained top-notch asset quality (lowest NPA in the industry at 0.30-0.40 percent).

HDFC Bank has always been robust, rising continuously through various economic cycles, as evidenced by its stock performance, which has grown at a CAGR of 15% over the last five years.

Given the unusual impact of the COVID-19 scenario on a variety of enterprises, the unsecured portfolio performance of the company may be seriously harmed and should be examined further. Being aware of this, HDFC Bank took a realistic approach and changed its attention to wholesale banking in FY2019-20, which helped to offset the decline in certain retail categories as a result of a general slowdown in spending.

In order to expand continually in a prudent manner, HDFC Bank maintained a prudent approach by balancing between both areas of business (corporate and retail). Furthermore, with the RBI’s limits on banks’ digital initiatives no longer in effect, retail loan buoyancy is projected to be driven by the bank’s aggressiveness to reclaim lost position.

As a result, the bank’s loan growth will improve, NIM will rise somewhat, and PPoP growth will increase. The bank’s granular liability franchise has a large and growing network of 5,779 branches, which bodes well for future growth.

PROS

• Company has delivered good profit growth of 20.06% CAGR over last 5 years

CONS

• Stock is trading at 3.73 times its book value
• Company has low interest coverage ratio.
• Contingent liabilities of Rs.1020028.80 Cr.
• Company might be capitalizing the interest cost
• Earnings include an other income of Rs.31758.99 Cr.

Kotak Mahindra Bank

Kotak Mahindra Bank, managed by Uday Kotak, is one of India’s largest financial services conglomerates, offering a comprehensive range of financial and banking solutions through 1,647 branches and 2,609 ATMs around the country.

Kotak Mahindra Bank, too, emerged as a cautious and cautious operator, focusing on just the highest-rated customers and sectors. This contributed to the bank’s low bad loan generation rates over time (Net NPA at 2.71 percent ). In the last five years, this banking behemoth has grown NII and profit CAGRs of 12.6 percent and 15.14 percent, respectively, and advances have grown at a CAGR of 5.27 percent.

The bank’s deposit franchise remains granular and strong, with excellent deposit accretion and an industry-leading CASA ratio of 59.90 percent in Q3FY22. In terms of unsecured retail, credit cards, and small business lending, Kotak Bank has maintained its conservative posture. Corporate and business, home loans and LAP, and agriculture receive 70% of the bank’s advances, with corporate and business having the biggest exposure of about 25%.

In recent remarks, Uday Kotak emphasized management’s intention to be more aggressive and focus on the asset side, with increased client acquisition, deeper relationships, and cross-selling. The bank’s steady leadership, strong liability franchise, best-in-class profitability, and prudent underwriting practices have all been demonstrated.

PROS

• Company has delivered good profit growth of 19.64% CAGR over last 5 years

CONS

• Stock is trading at 4.40 times its book value
• The company has delivered a poor sales growth of 8.61% over past five years.
• Company has a low return on equity of 13.70% for last 3 years.
• Contingent liabilities of Rs.241709.04 Cr.
• Company might be capitalizing the interest cost
• Earnings include an other income of Rs.25142.42 Cr.
• Promoter holding has decreased over last 3 years: -4.01%

ICICI Bank

On the back of more diverse offerings, ICICI Bank, along with the other private sector lenders mentioned above, has been successful in acquiring market share. In comparison to the existing public sector players, their investment in technology has set them apart.

In terms of asset size, ICICI Bank is India’s second largest private sector bank, and it is one of the country’s Domestic Systemically Important Banks (D-SIBs). As of December 31, 2021, the bank’s total balance sheet size was Rs. 13,54,196 crores on a standalone basis. As of December 31, 2021, the bank had a Capital Adequacy Ratio (CAR) of 17.91 percent (under Basel III), with a Tier I CAR of 16.93 percent.

The strong retail franchise of the private lender aids in the mobilization of low-cost deposits and has allowed the bank maintain a good CASA composition of 44.9 percent as of December 31, 2021. As of December 31, 2021, it had a Gross NPA ratio of 4.13 percent and a Net NPA ratio of 0.85 percent, indicating that it has successfully limited the formation of bad loans. The bank’s asset quality would be a major monitorable in the context of the impact of Covid-19 and the broader slowness owing to lockdowns enacted across countries.

PROS

• Company has delivered good profit growth of 19.77% CAGR over last 5 years

CONS

• Stock is trading at 3.29 times its book value
• Company has low interest coverage ratio.
• The company has delivered a poor sales growth of 9.38% over past five years.
• Company has a low return on equity of 12.74% for last 3 years.
• Contingent liabilities of Rs.3076190.61 Cr.
• Company might be capitalizing the interest cost
• Earnings include an other income of Rs.62883.88 Cr.

Axis Bank

With a total balance sheet size of Rs. 11,13,066 crores as of December 31, 2021, Axis Bank is the third largest private sector bank. The private sector participant has maintained healthy capitalization levels and shown a solid ability to raise capital to fund growth and maintain a buffer beyond the minimal regulatory need, as well as a strong ability to raise funds through deposits and bonds.

As of December 31, 2021, Axis Bank’s total deposits have increased by 18% to Rs. 7,71,670 crores. As of December 31, 2021, the bank’s CASA deposit base accounted for roughly 44.00 percent of total deposits. It was able to restrict the formation of bad loans in the quarter ended December 31, 2021, reporting a Gross NPA ratio of 3.17 percent and a Net NPA ratio of 0.91 percent. As of December 31, 2021, standard restructured loans under the resolution framework for COVID-19 related stress totaled Rs. 4,643 crores, or 0.63 percent of overall customer assets.

On restructured loans, the Bank has a provision of 24%, which is higher than the regulation limit. It has a strong capital adequacy ratio of 18.72 percent and a CET1 ratio of 16.46 percent. Axis Bank currently has the biggest exposure, with 37 percent coming from home loans, 11% from LAP, and 11% from auto loans. During these uncertain times of COVID-19, the lender’s exposure to NBFCs and HFCs may constitute a risk.

PROS

• Company has delivered good profit growth of 28.99% CAGR over last 5 years

CONS

• Company has low interest coverage ratio.
• The company has delivered a poor sales growth of 8.79% over past five years.
• Promoter holding is low: 9.70%
• Company has a low return on equity of 8.41% for last 3 years.
• Contingent liabilities of Rs.1104000.18 Cr.
• Company might be capitalizing the interest cost
• Earnings include an other income of Rs.17268.13 Cr.
• Promoter holding has decreased over last 3 years: -9.00%

IndusInd Bank

IndusInd Bank and Bharat Financial Inclusion combined in 2019, making it a suitable fit for the bank’s rural banking and microfinance theme. The Bank is able to achieve significant progress in car financing because to its extensive domain knowledge and coverage. Over the years, it has been able to contain and reduce its problematic loans while maintaining constant double-digit growth in profitability and net interest income.

Under the leadership of recently appointed MD & CEO Mr. Sumant Kathpalia, IndusInd Bank is focusing on boosting retail lending, lowering reliance on huge deposits from the government and corporates, and maintaining long-term liquidity. The bank’s CASA ratio of 42 percent is among the best among India’s private sector banks. The bank’s provision coverage ratio of 72 percent lets it resist the COVID-19 pandemic’s shocks.

Following the Yes Bank debacle, IndusInd Bank saw huge deposits from government and corporates move to larger banks, but it was able to get the migrated deposits back, citing a 19 percent YoY increase in deposit base. With a slower rate of NPA generation, the bank was able to keep its NIMs at 4.1 percent (i.e. NNPA at 0.71 percent ).

PROS

• Company’s median sales growth is 19.96% of last 10 years

CONS

• Company has low interest coverage ratio.
• Promoter holding is low: 15.91%
• Company has a low return on equity of 10.56% for last 3 years.
• Contingent liabilities of Rs.873670.14 Cr.
• Company might be capitalizing the interest cost
• Promoters have pledged 45.48% of their holding.
• Earnings include an other income of Rs.7397.05 Cr.
• Dividend payout has been low at 9.30% of profits over last 3 years

Bandhan Bank

In 2001, Bandhan Bank began operations as a non-governmental organization (NGO) to provide microfinance services. Over the years, the bank has concentrated on helping India’s unbanked and underbanked population. It has been able to provide ordinary banking services, microfinance, MSME financing, and affordable housing finance to customers in the city, semi-city, and rural areas. By asset quality, loyal customer base, robust capitalization, and a highly experienced management team catering to rural areas to bank the unbanked people, the bank is a clear outlier in the banking market.

The bank finalized its merger with Gruh Finance to combine excellent organic growth with inorganic development potential, allowing it to enter the affordable housing industry in India. In the last three years, net interest income has increased at a CAGR of roughly 37.6%, while profit after tax has increased at a CAGR of around 31.12%.

Bandhan Bank, which focuses on the underbanked and unbanked, has a strong exposure to micro loans (now known as Emerging Entrepreneurs Business), accounting for over half of all loans. With a 57 percent concentration in both business and location, they are extremely reliant on the performance of a single business segment and region. However,

Bandhan Bank is a strong contender for growth in the Indian banking space due to their strong liability franchise, deep customer connect (50 percent exclusive borrowers, 80 percent borrowers served by bank and another lender), high customer vintage (50 percent borrowers are more than 4 years vintage), and long track record.

PROS

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CONS

• Stock is trading at 3.08 times its book value
• Company has low interest coverage ratio.
• Tax rate seems low
• Company has a low return on equity of 11.41% for last 3 years.
• Company might be capitalizing the interest cost
• Earnings include an other income of Rs.2822.82 Cr.
• Dividend payout has been low at 2.43% of profits over last 3 years
• Promoter holding has decreased over last 3 years: -42.27%

City Union Bank

Despite the industry’s varied problems, City Union Bank is a mid-sized private sector bank with a significant presence in South India that has regularly experienced good growth. As a mid-sized bank, City Union Bank stands out among its competitors. The bank has a total of 702 branches in India. In South India, there are 630 branches, with 486 of those in Tamil Nadu.

It has managed to keep net interest income in the low double digits while keeping NIMs at 4% and Net NPA at 3.44 percent. As of December 31, 2021, CUB’s return on asset was 1.15 percent and its return on equity was 10.64 percent. Given the bank’s strong performance over the years, slowed loan growth and a slowdown in deposit growth cannot be overlooked.

Furthermore, management has lately flagged potential stressed industries, such as hotels, lease rental discounting, commercial real estate, and others, which account for a small fraction of the company’s portfolio and could result in NPAs. In the short term, heightened NPA formation is projected to weigh on margins. The textile, metallurgy, and paper goods industries account for the majority of the bank’s exposure (about 10%), and any economic downturn in these industries could put pressure on asset quality.

However, based on prior experience, it is predicted that the bank would be able to weather these storms with the help of skilled and stable management. Due to the COVID pandemic and a lack of other development opportunities, management focused on improving gold loan, which climbed by 48 percent on a year-over-year basis.

PROS

—

CONS

• Company has low interest coverage ratio.
• The company has delivered a poor sales growth of 5.28% over past five years.
• Company has a low return on equity of 11.10% for last 3 years.
• Contingent liabilities of Rs.8564.17 Cr.
• Company might be capitalizing the interest cost
• Dividend payout has been low at 7.90% of profits over last 3 years

COVID-19’s Impact on the Banking Sector

For the time being, COVID-19 has cast doubt on the banking sector’s ability to develop rapidly while maintaining high asset quality. Recently, conservative banks have been planning for an unanticipated increase in nonperforming assets (NPAs), which has kept provisions high and impacted profitability, and many have already strengthened buffer capital to be proactive.

The already sluggish economy stifled business growth, which was exacerbated by lockdowns. The RBI’s asset quality moratorium has undoubtedly kept asset quality stable, albeit the prospect of a return to repayment after the moratorium ends remains an overhang. The moratorium is expected to start a fresh cycle of problematic loans in the banking industry as a whole.

New NPLs are projected to emerge across the sector, particularly in areas such as airlines, hotels, entertainment, leveraged corporates in real estate, power, NBFCs, and unsecured retails to some extent. As a result, the recuperation process could be significantly slowed. Banks, on the other hand, have given a one-time debt restructuring program in order to provide additional assistance to borrowers.

But only time will tell if that works and how many borrowers return their loans. Defaults will undoubtedly put pressure on the sector as a whole, but the moat and ALM experience that each of them possesses will undoubtedly permit long-term growth.

Portfolio of Models

As of 1 April 2022, the below curated portfolio would require a total investment of Rs. 20,942 to have exposure to the finest Indian banking stocks.

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