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Published: Nov 15, 2022
Updated: Nov 15, 2022
Happy days are back for the Indian banking sector, especially big banks, mainly as the bad dream of mounting NPAs has been dispelled by the government recapitalizing banks and creating a ‘bad bank’ to take the NPA burden off their backs. The other factor boosting the banking sector’s financials is the sharp recovery in credit demand and the raising of interest rates by the Reserve Bank.
The outcome: both retail investors and FIIs and FPIs are making a beeline for banking and finance companies’ stocks, with the attendant surge in stock prices, especially of the bigger banks, and a parallel surge in the sector’s indices. Rating agencies like India Ratings, Bloomberg and Deloitte are gungho over the sector’s prospects while advising banks to pursue new sources of value beyond product, industry or business model boundaries.
Keeping the current scenario in mind, Corporate India Research Bureau has suggested 10 promising stocks for investors’ consideration.
New winds of cheer have started blowing over the Indian banking sector and bank stocks have shaken off a bit from one of the world’s worst debt-laden sectors to emerge as drivers of the country’s equity, out-performing major global peers. Not only is the Indian banking and financial sector swiftly outperforming the global banking sector, even at home the sector has beaten several other sectors. While the BSE Bank Index has risen by 5 per cent since the beginning of 2022 as against a decline of nearly 4 per cent in the BSE benchmark Sensex, some key banking stocks like Bank of Baroda have rallied by 30 to 40 per cent in the same period as per the stock exchange data.
Indian banking stocks were hitherto crushed under mounting non-performing assets (NPAs) with unethical businessmen borrowing heavily and then raising their hands at the time of repaying loans. Some ‘creative’ and ‘dynamic’ borrowers included Vijay Mallya, Nirav Modi, Mehul Choksi, the Sandesara brothers (of Sterling Biotech), Jatin Mehta (Winsome Diamonds), Rishi Agarwal (ABG group), Arvind Dham (Amtek Auto), Kapil and Dhiraj Wadhvan (DHFL), and Sanjay and Sandeep Jhunjhunwala (Rai Agro). These big names apart, there are thousands of willful defaulters of bank loans. However, with the government helping banks to write off bad loans and replenish their funds from the budgetary provisions, these banks have come out of the vicious circle of bank defaults. Of late, the creation of a ‘bad bank’ to offload troubled loans has further helped banks to come out of the NPA woods.
At the same time, during the post-pandemic period there has been a sharp recovery in credit demand and with the Reserve Bank (in line with global central banks) raising interest rates, banks have entered a happier era of profitable banking. Little wonder, during fiscal 2022 and the first half of the current fiscal 2023, most banks have reported absolutely fantastic numbers which are way better than most sectors. In fact, their numbers are completely out of sync with what is happening globally. The banking sector now has a positive corporate portfolio with legacy bad loans being largely provided for and rising credit demand and interest rates leading to an optimistic environment.
Needless to say, investors have started rushing to buy banking stocks. Even FIIs and FPIs, which had offloaded their holdings and moved out of the Indian stock exchanges during the mid-2022 period, have returned with a bang and have started investing in banking and finance companies stocks heavily. Little wonder, prices of banking stocks have started scaling new highs. ICICI Bank had turned friendless around Rs 500/600 after the Chanda Kochchar scandal hit the bank, but today its stock price is in demand at around Rs 920. The scrip of Kotak Mahindra Bank has moved up from Rs 1,630 to Rs 1,950, that of Axis Bank from Rs 618 to Rs 860, of IndusInd Bank from Rs 760 to Rs 1,145, that of IDFC First Bank has doubled from Rs 28 to Rs 56 and that of Federal Bank has jumped from Rs 78 to Rs 135. Among nationalized banks, the quotation for Bank of Baroda has shot up from Rs 77 to Rs 165, for State Bank of India from Rs 425 to Rs 600, for Bank of India from Rs 40 to Rs 75 and for Central Bank of India from Rs 16 to Rs 25.
Interestingly, the Nifty50 and the S&P BSE Sensex are at their all-time highs, but there is unfinished business for Bank Nifty to test its all-time high as technically it is consolidating above the 36,000 mark. Multiple triggers may help Bank Nifty test its new high as ICICI Bank and SBI posted good results while heavyweights HDFC Bank and Kotak Mahindra Bank are doing very well because foreign institutional investors are showing some buying interest in the market after heavy selling in July 2022.
Prospects for the banking sector and banking stocks are highly promising as the Indian economy is showing a strong bounce-back after the second wave of the pandemic with record GST collections and most business activities at pre-Covid levels. The Q2 FY2020 performance of India Inc is one of the brightest in recent years. Of course, there are some worries like ‘taper talk’ and rising Covid cases in China and the US, but the Indian market is not showing any major weakness. Maintains a leading market observer and expert, “If global cues remain supportive, Indian markets may outperform others and Bank Nifty may take the leadership for further gains and FIIs could play a crucial role.”
According to India Ratings, “the banking sector outlook has been revised to ‘improving’ for the fiscal year 2023 from ‘stable’ as the banking system’s health is at its best in decades. The improving health trend that began in mid-FY2020 is likely to continue in fiscal 2023, helped by better credit demand and a strong balance sheet of lenders. For the next fiscal year, the agency expects credit growth to pick up to 10 per cent and sees the gross NPA ratio at 6.1 per cent.
The agency’s ‘stable’ outlook on public sector banks for fiscal 2023 reflects reasonable capital buffers, low overhang of corporate stresses in terms of expected slippages and the manageable impact of Covid-19.
The outlook for large private sector bank indicates their continued marketshare gains in both assets and liabilities. Most have strengthened their capital buffers and have proactively managed their portfolio.
According to the agency, “the growth will be supported by a pick-up in economic activity, higher government spending on infrastructure and a revival in retail demand.” The agency expects leverage to start building.
According to Bloomberg, “Five of the nation’s top six biggest banks have reported earnings for the latest quarter (Q2 FY2023) that either matched or exceeded consensus expectations and that has helped push the S&PB Banker up 17 per cent this year to an all-time high. Quips Uday Kotak, Managing Director of Kotak Mahindra Bank, “We are probably in one of the most important Cinderella times of the credit cycle.” Says Suresh Ganapathy, a well-known research analyst, “The banking sector now has a pristine corporate portfolio and legacy bad loans have been largely provided for.”
According to Deloitte’s 2023 banking and capital markets outlook, “A new global economic order seems imminent. Banks globally can chart a path through the current fog of uncertainty to reposition for a brighter future.”
According to the Deloitte report, “The global economy remains fragile going into 2023. Uncertainties abound due to an unprecedented confluence of factors—Russia’s invasion of Ukraine, supply chain disruptions, the meteoric rise in inflation, and tightening monetary policy across the world. And the potential for a mild recession or stagflation in certain economies is high.
“The ripple effects from a more fragile and fractious global economy will be felt disparately across the global banking industry (figure 1). Large, well-capitalized, diversified banks should weather the storms reasonably well.
“Over the long term, banks will need to pursue new sources of value beyond product, industry or business model boundaries. The new economic order that will likely emerge over the next few years will require bank leaders to forge ahead with conviction and remain true to their purpose as guardians and facilitators of capital flows. Banks should be bold and stay ahead of the curve, proactively shape emerging forces, and envision the possibilities beyond the current fog of uncertainties.”
The recent hike in the repo rate by the Reserve Bank of India has further cheered the banking sector, pushing up the prices of banking stocks. Maintains an analyst, “Banking stocks are rising due to the hike in the repo rate to 5.90 per cent. This move is expected to divert more debt investment money towards banks, leading to improvement in margins in the upcoming quarter. This move is expected to provide more liquidity to banks and higher interest rates which may lead to a rise in savings interest rates as well.”
Needless to say, research analysts have now started giving a ‘buy’ rating to banking stocks and investors are keen to add these stocks in their portfolio. With a view to making it easier for our readers to select such scrips, Corporate India Research Bureau has suggested these 10 stocks for their consideration.
| FACE VALUE | 02 |
| CMP | 920.15 |
| 52 WEEK HIGH /LOW | 943/642 |
ICICI Bank is the best bet among banking scrips. The banking company, which had lost its credibility with former Managing Director Chanda Kochchar indulging in corrupt practices and throwing corporate governance to the winds, has been totally transformed by new supremo Sandeep Bakshi, who has turned the bank into a clean, growth-oriented and ambitious banking entity during the last 3-4 years. He has put the bank on a solid growth path with promising prospects going ahead.
Little wonder, under the leadership of Mr Bakshi, ICICI Bank along with other leading private sector banks like HDFC and Kotak Mahindra has been successful in gaining marketshare on the back of better vertical products. Its investment in technology has made it stand out in comparison to public sector players. The second-largest private sector bank in the country in terms of asset size, it is designated as one of the domestic systematically important banks (DSIB) in the country. It reported a capital adequacy ratio (CAR) of 19.2 per cent on March 31, 2022. The bank's robust retail franchise helps in mobilization of low cost deposits and has helped it in consistently maintaining a healthy CASA mix of 45.2 per cent. It has managed to restrict bad loan formation and reported a gross NPA ratio of 3.6 per cent and a net NPA ratio of only 0.75 per cent as on March 31, 2022.
Even its arch rival HDFC Bank acknowledges ICICI Bank's strong balance sheet with sticky clients, lower stress levels, high PCR (provision coverage ratio) and adequate CAR (Capital Adequacy Ratio), improved underwriting practices and lower exposure to contextually vulnerable products. On a relative comparison basis, we think ICICI Bank is better placed both in terms of operational and financial metrics as well as valuation.
Needless to say, the bank has gone from strength to strength on the financial front. During the last 12 years, its revenues have more than trebled from Rs 30,081 crore in fiscal 2011 to Rs 95,407 crore in fiscal 2022, with operating profit inching up from Rs 22,387 crore to Rs 26,558 crore and the profit at net level spurting over four times, from Rs 6,318 crore to Rs 26,538 crore, during this period. The company's financial position is very strong, with bumper reserves at the end of March 31, 2022 standing at Rs 180,396 crore - over 129 times its equity capital of Rs 1,390 crore and that too after a 1:1 bonus issue during 2017.
| FACE VALUE | 01 |
| CMP | 1625.50 |
| 52 WEEK HIGH /LOW | 1722/1271 |
HDFC Bank, promoted by HDFC, is India's largest private sector bank by assets and the world's 10th largest bank by market capitalization. Again, it is the third largest company by market cap ($ 122.50 billion) on the Indian stock exchanges. The bank has created its industry-leading position by catering majorly to individuals and is focused on every aspect of retail banking, including private banking and wealth management. The bank has maintained its topnotch asset quality of 0.3 per cent (lowest NPAs in the industry) while growing business in double digits over the years. The bank has always been strong, growing consistently through multiple economic cycles, and has always been considered as a benchmark for strong performance.
Spun off from its parent company HDFC in 1994 with a single full-service branch in Mumbai, the bank has since grown into a financial behemoth, covering India with 6,342 bank branches and more than 15,000 ATMs across 2,800+ cities and in the towns. This bodes well for the growth liability franchise in the bank's granual. Further, the bank's intention to add 6,000 branches in the next five years would help the bank in increasing its marketshare across segments. Today, the bank has a strong deposit and loan franchise which accounts for 71 per cent of its total revenues, along with a nice chunk of other fee-based revenues. The bank is also highly fintech-forward with 95 per cent of all transactions through internet and mobile channels, making it one of the largest banks in India by digital transactions.
| FACE VALUE | 05 |
| CMP | 1951.65 |
| 52 WEEK HIGH /LOW | 2081/1630 |
In 2003, Kotak Mahindra Finance, an NBFC set up by Uday Kotak and Anand Mahindra, was converted into a banking entity styled 'Kotak Mahindra Bank' after it received a banking licence from the Reserve Bank of India, the central bank of the country, which has by now emerged as one of India's leading financial services conglomerates engaged in providing a wide span of various financial and banking solutions with a reach of 1,647 branches and 2,609 ATMs spread across India. It also emerged as a player which adopted a prudent and cautious approach, targeting only high-rated customers and sectors, which aided the bank's low levels of bad loan formation over the years (net NPA at 0.64%).
This banking behemoth has managed to achieve profit CAGR of 19.6% in 5 years and has managed to grow advances at 7.2% CAGR in 4 years. The bank's deposit franchise continues to be granular and robust with deposit accretion staying healthy with an industry leading CASA ratio of 60.7% in Q4FY22.
The bank has maintained its cautious stance towards unsecured retail, credit cards and small business lending. It's 70% advances are given to corporate and business, home loans & LAP and the agriculture segment, with the corporate and business division having the highest exposure of nearly 25%. Uday Kotak in his recent comments has highlighted the 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.
| FACE VALUE | 02 |
| CMP | 858.75 |
| 52 WEEK HIGH /LOW | 920/618 |
The third largest private sector bank in India, Axis Bank has a total balance-sheet size of Rs 11,95,529 crore (as on March 31, 2022). The private sector player has maintained healthy capitalization levels and demonstrated strong capital ability to raise capital to fund growth and maintain a cushion over minimum regulatory requirements as well as a strong ability to raise resources by way of deposits and bonds. The bank's total deposits grew by 17.7% as on March 31, 2022. The bank has a sizable CASA deposit base which constituted around 44.92% of total deposits as on March 31, 2021. As of the quarter ended March 31, 2022, it has been able to contain formation of bad loans and has reported a gross NPA ratio of 2.8% and a net NPA ratio of 0.70%.
The bank carries a provision coverage ratio of 75%. Its capital adequacy ratio stands robust at 15.4%. Currently, Axis Bank has the highest exposure; i.e., 37% from home loans, 11% from LAP and 11% from auto loans. The exposure towards NBFCs and HFCs can pose a risk to the lender during these uncertain times of Covid-19.
| FACE VALUE | 01 |
| CMP | 183.45 |
| 52 WEEK HIGH /LOW | 200/108 |
A mid-sized private sector bank with a strong presence in South India, City Union Bank has consistently achieved healthy growth despite various challenges faced by the industry. Being a mid-sized bank, CUB stands out amongst its peers. The 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 assets stood at 1.43% and return on equity stood at 13% as on March 31, 2022. Given its healthy performance over the years, one cannot ignore muted loan growth as well as a slowdown in deposit growth.
Further, recently the management has indicated potential stressed sectors, namely hotels, lease rental discounting, commercial real estate, etc. which account for a minuscule portion of its portfolio, a portion of which may slip into NPAs. It is expected that elevated NPA formation may still weigh on margins in the near term. The bank's majority exposure (i.e. approx. 10%) comes from the textile, metals and paper products industries and any economic downturn in these industries may create pressure on asset quality. However, it is expected from past experience that given the backing of an experienced and robust management, the bank would be able to sail through these uncertain times.
| FACE VALUE | 10 |
| CMP | 56.20 |
| 52 WEEK HIGH /LOW | 60/28 |
Seasoned banker P Vaidyanathan has performed a sort of miracle by transforming a term-lending financial institution into a vibrant retail bank which is expected to emerge as a future ‘HDFC Bank’ after a decade or so. A small bank formed after the merger of IDFC Ltd and Capital First, IDFC First Bank has started growing at a pace which can easily take it into the league of big private sector banks in the coming decades.
During the last three years, it has consciously increased its mix of retail business almost five times in retail deposits and simultaneously improved the CASA mix to 50 per cent. Further, the retail loan book posted an impressive 31 per cent CAGR over the fiscal years 2019-2022.
At the same time, the bank is well-positioned to benefit from a gradual run-down of its high-cost legacy borrowings over fiscal years 2023-2026 (Rs 22,400 crore at 8 to 9 per cent cost) and replace them with deposits (at 5.5 per cent cost). This will potentially add around Rs 800 crore to net interest income (NII) in due course.
The bank is all set to enter a phase of strong loan growth. In fact, since its inception, the bank has started building a loan book with a primary focus on retail assets, the share of which has shot up from 38 per cent in fiscal 2019 to 74 per cent at the beginning of the current fiscal (2023). Over the past three years, overall funded assets have reported a modest 6 per cent CAGR as the wholesale book declined 46 per cent due to a run-down of the legacy infra book while retail and commercial loans posted a 31 per cent CAGR. Research analysts at Motilal Oswal expect total loans to clock 21 per cent CAGR over fiscal years 2022-2025 as the drag from the wholesale book moderates. Since its inception, the bank has consistently expanded its footprint by opening 445 branches and 695 new ATMs.
With rapidly rising retail deposits, loan retailisation on track, a marked improvement in asset quality with legacy issues in the wholesale loan book left behind, and sustained branch and product expansion, the bank is on a strong growth path. At the same time, with the help of quality service levels, remarkable transparency and customer friendly products, IDFC First Bank has emerged as a strong brand and is all set to scale new heights in coming years. Shares of the company are quoted around Rs 55 and various analysts have set a target ranging from Rs 70 to Rs 85 within a year. We will not be surprised if the share price crosses the Rs 100 mark within the next 3 years.
| FACE VALUE | 01 |
| CMP | 600.00 |
| 52 WEEK HIGH /LOW | 62/425 |
State Bank of India (SBI), the largest commercial bank in the country enjoying about 23 per cent marketshare of the Indian banking sector, has a strong domestic presence with more than 22,415 branches and an international presence with around 200 branches across 38 countries. Headquartered in Mumbai, SBI is the 49th largest in the world by total assets and ranked 221st in the Fortune Global 500 list of the world’s largest corporations of 2020, being the only Indian bank in the list.
This Indian multinational PSU has made rapid strides in its performance, notwithstanding intermittent tough periods, including bank frauds and the Covid pandemic. During the last 12 years, its revenues more than doubled from Rs 113,633 crore in fiscal 2011 to Rs 289,973 crore in fiscal 2022, with operating profit shooting up over five times from Rs 12,146 crore to Rs 63,570 crore and the profit at net level more than trebling from Rs 12,416 crore to Rs 37,183 crore during this period. The company’s financial position is very strong, with reserves at the end of March 31, 2022 standing at Rs 274,669 crore, about 308 times its equity capital of Rs 892 crore.
Future prospects are quite promising. Maintains Geojit Securities, “The structural value of the bank remains intact in the long run.” The share price is quoted around Rs 600 and a research analyst expects it to move up further to around Rs 700 within a year.
| FACE VALUE | 10 |
| CMP | 314.25 |
| 52 WEEK HIGH /LOW | 316/171 |
Over a century old, Mangalore-headquartered Canara Bank is a leading PSU bank and after the merger of Syndicate Bank with it, it is ranking as the fourth largest PSU bank in the country. It comprises treasury operations, retail banking operations, wholesale banking operations and other banking operations.
The bank has been reporting consistent growth in its net profit since the last eight quarters. Inspite of weathering storms, the bank has registered remarkable growth. During the last 12 years, its consolidated revenues have more than trebled from Rs 23,001 crore in fiscal 2011 to Rs 70,614 crore in fiscal 2022, with operating profit recording a six-fold spur from Rs 2,214 crore to Rs 13,657 crore and the profit at net level inching up from Rs 3,949 crore to Rs 6,158 crore during this period. The company’s financial position is sound, with reserves at the end of March 2022 standing at Rs 68,147 crore against its equity capital of Rs 1,814 crore.
There has been a steady improvement in the company’s asset quality. The absolute GNPA is decreasing gradually with moderate slippages and higher recoveries. A research analyst who tracks the banking sector estimates the GNPA/ NWDA ratio of Canara Bank at 6.7 per cent/2.3 per cent at the end of fiscal 2023 with a stable PCR of 7.5 per cent.
Shares of the company are placed around Rs 313.50 a piece. Analysts expect it to go up to at least Rs 400 within a year.
| FACE VALUE | 02 |
| CMP | 163.60 |
| 52 WEEK HIGH /LOW | 169/77 |
Bank of Baroda (BoB) is the second largest PSU bank in India after State Bank of India, with 132 million customers, a total business of $ 218 billion and a global presence of 100 overseas offices. It is ranked 1,145 on Forbes’ Global 2000 list.
Bank of Baroda’s key products/revenue segments include Interest & Discount on Advances & Bills, Income from Investment, Interest and Interest on Balances with RBI, and Other Inter-Bank Funds for the year ending March 31, 2022.
The bank has fared well on the financial front. During the last eight years, its consolidated revenues have expanded from Rs 45,799 crore in fiscal 2016 to Rs 73,385 crore in fiscal 2022, with the profit at net level amounting to Rs 7,233 crore in fiscal 2022, in striking contrast to a loss of Rs 5,033 crore in fiscal 2016.
The company is doing much better going ahead. For the quarter ended Sept 30, 2022, the company reported a Consolidated Total Income of Rs 26,320.49 crore, up 21.99% from the last quarter Total Income of Rs 21,576.76 crore and up 19.65 % from last year’s same quarter Total Income of Rs 21,998.76 crore. The bank reported net profit after tax of Rs 3,400.47 crore in the latest quarter.
The stock is in the consolidation phase, forming a chart pattern which indicates bullish continuation. At present, shares are quoted around Rs 161 and analysts expect the price to cross the Rs 200 mark by the end of the next year.
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