Top 5 Banking Stocks in India

If one were to regard an economy as a living, breathing creature, money would really be able to live up to its comparison as the “lifeblood” of said economy.
But if money, or rather, finance, is the blood of an economy, the banking system is the circulatory system. No really, the banking system is actually a structure consisting of organisations and institutions that help keep the money in the economy flowing from those who have it(savers) to those who may need it(individual and organisational borrowers) and those who may use it(investors).
“There have been three great inventions since the beginning of time: fire, the wheel and banking institutions” -Will Rogers.

This is the role that banks play in the economy, as a gear in the system. What we need to remember is that banks themselves are complex organisations with their own internal mechanisms.
One of these mechanisms, which is highly essential for the economy, is credit creation, where banks accept deposits and provide advances from said deposits.
Credit creation helps grow the economy by allocating stagnant funds to people who might use them for purposes like investing or the creation and sustenance of a business.

The financial world of the banking industry goes much deeper, and today we look at what makes these monetary giants tick, to better understand how to choose their stocks, should one be looking to invest in them.

The image below gives a snapshot of the banking industry structure. Now let’s get to the factors that affect the banking stock purchase decisions.

Factors to consider when buying “Banking Stocks”

CASA Ratio 

CASA stands for current accounts-savings accounts, and it indicates the proportion of total deposits and fundings that a bank gets in the form of savings and current account receipts. It is one of the most critical factors that an investor must analyze because it helps them understand the proportion of the funds banks raise via core activities, i.e., accepting deposits from savings and current accounts.

Via CASA, banks can secure funds cheaply to lend at competitive rates, and thus CASA can be a winning edge. Hence investors must look for banking stocks with high CASA.

NPA Trends

This is the most crucial aspect that is looked up to both by the investors and the other users of financial statements (government, management, etc.) A non-performing asset is an advance for which the principal or interest payment remained overdue for a period of 90 days. There are various categories of NPA further based on the number of days the dues are pending. RBI mandates the provisioning of diverse types as well. The lower the NPA trends, the better is the asset quality of a bank.

Cost of Liabilities & Net Interest Margin (NIM)

Those of you who are well learned of the concept of cost of capital will find this point very easy to understand and analyze. 

For the benefit of all, the cost of liabilities is the amount that it costs the bank to raise funds/ accumulate deposits. In contrast, NIM is the difference between the income that a bank generates from its credit activities and the expenses that it has to pay to accumulate those deposits for imparting credit. 

Banking stocks with a lower cost of liabilities and higher NIM are placed well fundamentally. This metric helps investors in analyzing the direct visibility of profits that banks and financial institutions make.

Capital Adequacy Ratio (C.A.R)

Banks have to conduct massive operations to be profitable, and thus RBI keeps a constant vigilance at the C.A.R of all the banks and mandates any needful changes from time to time. The higher the C.A.R is, the better it is for the banks because then they have higher flexibility to expand and grow their advances at a good pace.

Diversification of Loan Book

Investors must thoroughly analyze the assets that these banking stocks hold in their balance sheet. A prudent bank will diversify its loan book; this helps them provide a leeway because there are sectors that might underperform at times. And hence NPA’s could increase. But when the loan books are diversified, the probable risks are well mitigated to an extent. Also, it helps banks to create last mile outreach and hence promote multi-dimensional growth and strength to the economy.

As per Peter Lynch, when buying banking stock, an investor must look at the following. 

Price-to-book value: Lesser the better
Equity-to-asset ratio: Above 6 good
Non-Performing assets: Below 2%
Risky loan proportion to total loan book size: less than 5% 

Now, having built upon the art of scouting out fundamentally strong banking stocks, it's time for us to get our hands dirty and look into the top banks in India.

Top 5 Banking Stocks in India

HDFC Bank

Incorporated in August 1994, HDFC Bank is currently the largest private sector bank in India via asset size, the 3rd largest company by market capitalization listed on the Indian stock exchange, and the 5th largest employer in India. The bank has enjoyed a distinguished legacy in terms of capturing the retail and wholesale markets of our country for years now. 

Below are some of the metrics for analysis you must consider.  

SBI ( State Bank of India)

SBI is the oldest bank associated with the Indian subcontinent. The early days of the bank go back to the first decade in the 19th century. It was with the establishment of the Bank of Calcutta in 1806 in Calcutta. Later on 1st July 1955, SBI was constituted with a new sense of social purpose to act as the pacesetter for rural development and lead the Indian banking system into the exciting field of national development.

The bank has a strong portfolio with diversified products & services and takes good advantage of technology to deliver and manage personalized and customer-centric services. Its business is more than banking because it touches the lives of people anywhere in many ways.

ICICI Bank

ICICI Bank Ltd. is a leading private sector bank in India. The bank's history goes way back to 1994, when ICICI Limited promoted it. ICICI is an initiative of the World Bank, the Government of India, and representatives of Indian industry.

The core motive behind its incorporation was to create a financial institution for providing medium-term and long-term funds to Indian businesses. ICICI’s primary focus until the late 1980s was on project finance and providing long-term funds to a variety of industrial projects.

With LPG (Liberalisation, Privatisation & Globalisation) maximizing prospects for our country in 1991, ICICI transformed its business to be a diversified financial services provider.  The bank, along with its subsidiaries and other group companies, offered a wide variety of products and services that serve the financial needs of Indians.

The bank has an extensive network of branches,  ATMs, and other touchpoints to connect via customers physically and remotely. It is taking advantage of the technology and offering services through digital channels like mobile and internet banking. Hence technology has been the core competency for ICICI bank to excel and create product differentiation, thus creating an edge over other competitors.

Kotak Mahindra Bank

Established in 1985, Kotak Mahindra group has been one of the financial conglomerates of good repute serving both the investors (by delivering healthy EPS) and its customers (by offering attractive interest on deposits and borrowings); the bank has its headquarter in the financial capital of our country, Mumbai and offers multi-dimensional products and financial services for corporate and retail customers in diverse domains like personal finance, investment banking, life insurance, and wealth management. 

In February 2003, Kotak Mahindra Finance Ltd was granted a banking license by the godfather for bank RBI.

This approval got deeply engraved in history books of the banking regime of our country since  Kotak Mahindra became the first NBFC in India to convert itself into a bank as Kotak Mahindra Bank Ltd. Today, the growth pace of this bank is very promising. Kotak bank has the highest CASA ratio amongst all its banking peers. 

Let's look at some supporting data that will help us form an opinion about the bank.

Axis Bank

Axis Bank was incorporated in 1993, jointly by a broad group of government entities consisting of Specified Undertaking of Unit Trust of India, Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC), National Insurance Company Ltd., New India Assurance Company Ltd., Oriental Insurance Company Ltd., and United India Insurance Company Ltd. 

Axis Bank is the 4th largest private sector bank in India in terms of market capitalization. It has a large footprint of various domestic branches (including extension counters) with vast numbers of ATMs & cash recyclers spread across the country. 

The latest figures state that almost around 76.5% of its stake lies with FIIs and DIIs. Yes, it's quite a considerable number. But let's analyse the statistics before deciding anything.

Found the blog interesting so far, so why curb your curiosity at this point? Go ahead and visit the link below to read the Investment Insight article "Can picking Cheap Banking Stocks be Expensive?" 

Where you will get to know about Risk-weighted assets, Capital Adequacy Ratio, and much more in detail.

So what are you waiting for? You are just a click away to quench your thirst for knowledge. "Can picking Cheap Banking Stocks be Expensive?"

Follow the link and login(if you aren't already) to read.

Conclusion

As the economy progresses and grows, so will the need for money, and banks will always be an equally essential part of the economy. Thus growth prospects in this sector shall be ever-present.

With the responsibility for ongoing, feasible development depending on the frequent banking reforms, the country’s regulatory bodies end up acting as the nexus that connects the various branches of the banking system from both inside and outside the economy.

*Disclaimer: The stock discussed above aren't recommendations from Finology, they are only picked to make you understand the concept.