Best Banking Stocks in India: Should you invest?

bank stocks india

Importance of Investment in Best Banking Stocks in India

When talking about banking stocks, they are like the veins of stock exchanges. NIFTY50 alone has 9 banking stocks, this is a clear indication towards the popularity of banking stocks. Further, as per Indian experts, the growth of the economy is not possible without the role of the banking sector. With this thought in mind, investors have invested extensively in the best bank stocks over the last 5 years. Not just stocks, but bank mutual funds are also very popular investment options in the stock market. Keep reading to find out the best bank stocks to buy. 

List of 10 Best Bank Stocks to Buy Now in India based on M-Cap   

Stocks Market Capitalization (in Crores) P/E Ratio 5 Year CAGR Return
HDFC Bank 7,47,58719.6510.2%
ICICI Bank 4,94,06519.6819.5%
Kotak Bank 3,31,78227.8111.8%
Axis Bank 1,97,28914.024.2%
IndusInd Bank 63,28513.17-11.6%
Bandhan Bank 43,000342.24-10.7%
AU Small Finance Bank36,75032.6814.4%
IDFC First Bank19,500149.3-11.8%

Disclaimer: The securities quoted are exemplary and not recommendatory. Past performance is not indicative of future returns

Why Should You Consider Banking Stocks for Long-term Investment? 

There are multiple reasons which make banking stocks a great investment option for long-term investors in India. Some of these are as follows:

1. Growing Competition in Banking stocks in India 

Competition among banks is fierce, and this is the main reason why you should purchase and hold your banking stocks. Further, the RBI is coming up with new changes in the banking policies and is pressuring banks to tackle the poor loan menace and perform better. 

The RBI is also issuing several licenses to suffice the requirement for increased financial inclusion, which will grow the prices of banking stocks shortly. This will allow new banks to come up with better options and existing banks to offer even better offers. The healthy competition between banks is a great reason for investing in banking stocks for the long term. 

2. Government Encouraging to Open More Bank Accounts

With the advent of  Pradhan Mantri Jan Dhan Yojana (PMJDY), the government of India has ordered banks to open Zero balance accounts for all the people who don't already have a bank account. In February 2018, more than 310 million bank accounts were activated under this Yojana with an approximate deposit worth Rs74,534.79cr. 

This opening of millions of bank accounts has made the banking stocks even more valuable. Banks are opening more and more accounts with each passing minute. What's this mean?  The stock prices will go higher and higher. 

3. Consolidation in the Banking Sector 

This is perhaps the most rewarding thing for the banking sector investors and shareholders. The government's idea to merge the small banks with large banks with huge market cap has offered several benefits for the investors. 

If you don't already know, SBI (State Bank of India) was merged with five other non-performing banks back in 2017. The success of this idea has resulted in the growth and revival of the Indian banking sector. Further, the government has introduced a committee headed by Arun Jaitley (Finance minister of India) to look into the merger of large banks like PNB and SBI with small banks. 

The consolidation in the sector will have a tremendous impact on the banking sector as well as our economy. For instance, suppose you've purchased the shares of SBI bank, which is merged with 5 other banks, imagine the positive impact on the SBI share prices. The total number of accounts and the value of deposits with SBI will increase significantly. This in turn will increase its share price. 

So, these are some reasons why you should consider investing in bank stocks for the long term. 

How to Evaluate Best Bank Stocks in India? 

Because the business model of a bank is different from that of other businesses, the way of evaluating different banking stocks is also different. Below are some factors that you should consider at the time of evaluating bank stocks:

Credit to Deposit Ratio & Capital Adequacy Ratio 

The first thing you should look at while evaluating the Indian bank stocks is the amount of their total cash deposit. This can be determined with the help of the credit deposit ratio (CDR) of the bank. It shows the funds lent to the customers out of the total amount raised through cash deposits. The higher value of this ratio shows better utilisation of funds. 

The next factor to look at is the capital adequacy ratio or CAR. As per RBI, the minimum adequacy ratio of a bank should be 10. This ratio indicated that banks don't expand and grow their business without having enough capital Buffer. 

Return on Assets (RoA) and Return of Equity (RoE) 

Both of these are the standard parameters to check the profitability of a banking stock. It's a negative sign when a banking stock's RoA or RoE deviated excessively from the same ratios of its peers. It is very convenient for banks to grow short-term earnings by either leveraging the balance sheet or eliminating bad loans. However, this increases the risk in the long term. Below is how you can calculate the Return on Assets of bank stocks:

ROA = Net Profits ÷ Average Total Assets

Efficiency Ratio 

Next, take a look at the operating profit margin of the stocks you've shortlisted. If the bank is able to manage its expenses, it's a good sign. 

To calculate the operating profit margin of any bank, simply deduct the network extension and administrative expenses (including network expansion cost, salary cost etc.) from its NII (Net Interest Income) 

Operating Profit Margin =  ( Net interest income - operating expenses) ÷ Total interest income 

Cost to Income Ratio 

Reducing overheads is critical for the bank. Most banks do this with the help of technology upgradation and branch rationalisation. The cost-to-income ratio of a bank shows how good it is working towards controlling overheads. 

Cost to Income Ratio = Operating expenses ÷ (Non-interest income + Net Interest Income) 

Net Interest Margin (NIM)

NIM or net interest margin is basically the percentage of average earning assets. It indicates how positive a bank's deposit generating and lending operations are. So, always keep your eyes on the past performance of the bank's NIM. Here is the formula to calculate the net interest margin of banks:

Net Interest Margin = (Interest income - interest expenses) ÷ average earning assets 

Price-to-book Ratio (P/B) 

The price-to-book ratio is one of the most important metrics for evaluating any kind of stock. A banking stock is no different in this regard. The best way is to check the current P/B ratio of the bank stocks and compare it with the P/B ratio of the past five years. Also check it against the p/b ratio of its peer stocks. 

Bottom Line 

The banking sector plays a very important role in defining the status of a country's economy. It is responsible for the functioning of a nation. Investing in bank stocks is a great idea looking at the growth and promising future of the sector. We have provided you with a list of the best bank stocks along with several other details on banking investment. We hope it helps!

Important things to remember:

1. Do Not Blindly Follow Hot Tips

No matter how credible the source is, never follow a stock marketing tip blindly without conducting thorough research personally. Always select the stocks after doing proper research and analysis on the performance as well as the companies. While some tips can work out to give you huge benefits, the wrong ones can push you down under the risk pretty quickly. 

2. Eliminate Loser Stocks from Portfolio 

There is absolutely no guarantee that a stock will rise after a great fall. Know that it is extremely important to be practical about what is possible and what's impossible in the stock market. So, upon realizing that a stock is performing poorly in your portfolio, accept your mistake and sell it immediately to prevent further losses. 

3. Don't Exceed Your Investment Budget Abruptly 

While it's true that long-term investments are way better than other forms of investment, you shouldn't exceed your investment budget in a haste. Instead, decide on a fixed amount and invest it across various good stocks. Rather than investing in only one stock, divide your budget evenly across multiple good-performing stocks and shares. 

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