Owing to the Corona pandemic, banking and financial stocks have witnessed a sharp correction this year. A drop in interest rate, a whooping insurance claim, high unemployment rate, loan default, and an economic recession all the factors have led the banking stocks to a huge correction. Banking stocks corrected about 40% in 2020.
In this detailed guide, you will find the best bank stocks to buy now in India. They are able to yield the best returns in the long run.
There is an ample number of banking stocks trading on the BSE and NSE. It is a tuff call to pick the best bank stocks to buy now in India.
How to pick the best bank stocks to buy for long-term
Here are the 10 parameters to check when you are looking for the best bank shares to buy now.
Parameter #1. Debt to Equity Ratio
By dividing the total liabilities of a company with its total shareholders’ equity we will find the debt to equity ratio. You are free to invest in those companies that are debt-free or have a marginal debt ratio [0.25].
You can get the company’s financial health by checking the debt to equity ratio. The debt to equity ratio helps you to gauge whether the company is able to cover all the outstanding debt by liquidating its asset when the company witnesses a deep in its earnings during an economic cycle.
By analyzing the debt to equity ratio you will get a detailed snapshot of the company’s debt be it for the long run or for the short term. When you have found that the company doesn’t have significant debt for the long run, and the company is able to clear the debts since the company has robust earnings year-on-year, it’s time to include that company in your stock portfolio.
Parameter #2. Profit Margin
Analysts use the profitability of a company to find the profit margin of a company. The profit margin represents what percentage of sales has been converted to profit from operations. A company’s profit margin is 20% signifies that the company is able to generate a net income of $20 when its total sales stand at $100 from the business operation.
Do remember different sectors have different profit margins.
The software or Gaming or Pharma sector is a capital intensive sector. It requires high capital investment to develop a software or a medical drug. But when they are developed once, they can sell millions without any competition since the product is patent-protected.
Contrary to that, Agriculture and Automobile sectors have a low-profit margin. The agriculture sector may witness the loss of crops owing to the untimely rain, high inventory, etc. A company operating in the automobile sector faces intense competition from peer companies and uncertainty in consumer demand. It has a lower profit margin.
Parameter #3. Earnings per Share
On dividing the company’s net profit with its total shares outstanding, you will find Earnings per Share.
Let’s make it clear with the following example.
Suppose, Berger paints and Kansai Nerolacboth have delivered the same net income of 1000. But Berger paints have 100 shares outstanding and Kansai Nerolac has 125 shares outstanding. When you put the numbers you will find the EPS of Berger Paints and Kansai Nerolac is 10 and 8 respectively.
When it’s time to pick the best stocks, you should start investing in Berger Paints. Berger Paints has a higher EPS. The chances are higher that investors are willing to pay more for Berger Paints when they find that the company is delivering higher profits relative to its market price.
Parameter #4. Dividend Yield
Dividend Yield can be calculated by dividing the company’s dividend for owing a share with its current share price.
Do remember, high dividend yield doesn’t signal attractive investment opportunities. The dividend yield may be higher because of a decline of stock prices during a sharp market correction.
Parameter #5. Return on Equity
Return on Equity is calculated by dividing the net income of a company with its shareholders’ equity.
The Return on Equity reveals the profitability of the company. A higher return on equity doesn’t necessarily mean that the company is profitable. Take a close look at its debt obligations and watch out whether the company accelerates the growth by pumping external capital or not. When you find that the ROE is increasing year on year without any debt financing, it signifies that the company is quite efficient enough to generate profit by running a business operation. As a rule of thumb when you find any company with ROE above 15% and it increases steadily year on year, the company is worth an investment.
Parameter #6. Return on Equity Employed
To gauge the profitability ROCE is a key metric that analysts make use of.
ROCE reveals what liabilities, assets, debt obligations a company has. So, it becomes easier to calculate the profitability in capital-intensive sectors namely Banking, Financial, energy, and consumer durables.
When it’s time to pick the best stocks in the capital-intensive sectors, invest in those companies of which ROCE is steadily rising year on year instead of those companies of which ROCE is volatile or is heading to lower levels.
Parameter #7. Price to Sales Ratio
When you divide the market capitalization of a company with its total sales revenue of a financial year, you will find the Price to Sales Ratio.
By calculating the Price to Sales Ratio, a retail investor can find how much investors are willing to pay per rupee of sales for a stock. The lower the price to sales ratio is, the better the investment opportunity is.
Parameter #8. Price to Earnings Ratio
The Price to Earnings ratio is calculated by dividing its current share price with its earnings per share.
By calculating the Price to Earnings ratio, you can gauge what the market is willing to pay today for a stock for each dollar of earnings that are either delivered in the past or for future earnings.
A higher price to earnings ratio doesn’t mean that the stock is overvalued or a company with a lower price to earnings ratio is undervalued. Each sector has a different price to earnings ratio.
Take the example of the banking and financial sector. A higher P/E ratio may be a clear indication that the investors are willing to pay higher. They hope that the earnings of a company are likely to rise resulting in an increase in dividend and a sharp rise of the share price.
When you have found companies that have robust earnings and marginal debt obligations with a price to earnings ratio is 9 or lower, you are free to invest. In this situation, the chances are higher that the company will deliver the best returns in the long run.
Parameter #9. Price to Book Ratio
The Price to Book Ratio is calculated by dividing the market price a share with its book value per share.
You will find the market price by typing the company’s name in the google search box.
To calculate the book value just look at the balance sheet and you will find total assets and total liabilities. The book value of a company reveals what is left in the bank account, when a company has liquidated all of its assets and clear the debt obligations.
Like the Price to Earnings ratio, price to book ratio varies from sectors to sectors. A higher Price to Book ratio may be a clear indication that the stock price is trading higher in comparison to the company’s book value or has delivered robust earnings. Contrary to that, a low Price to Book ratio reveals that the share price of a stock has witnessed a sharp correction or generates poor returns on its assets.
When you are hunting high and low for undervalued stocks, make sure to check not only earnings but also assets and liabilities a company has. Then you will find a valid reason why the price to book ratio is 1.0 or 3.0.
Parameter #10. Current Ratio
By calculating the current ratio you can assume the ability of the company to clear all short-term debt obligations by liquidating the assets.
When the current ratio is greater than 1, the chances are higher that the company will be left with working capital in its bank account after liquidating all the assets to repay the short-term debt obligations.
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7 Best Bank Stocks to buy now in India
When you are hunting high and low for the best banking stocks to buy in India for long term, here are the 7 best bank stocks to buy now in India.
HDFC Bank
The private banks are doing well in the Indian economy. If you are searching for the best private bank stocks to buy now in India, then HDFC Bank is the best pick that will yield the best returns in the long run.HDFC Bank is the largest private bank in India in respect of assets and market capitalization. As of 2021, HDFC Bank operates across India with a banking network of 5430 branches in 2848 cities and towns. They offer ATM services through 15292 ATMs across the country.
HDFC bank has consistently delivered a 19% sharp rise in its revenue. It has also witnessed a 21% jump in profit margins during the past 5 years. When you take a close look at its profitability, you will find that HDFC has delivered a 22% CAGR to its investors during the past 10 years. The company is quite successful to limit the Net NPA to 0.36% when the Gross NPA stands at 1.26%.
Ah! one more thing.
Not only the FIIs but also the DIIs are increasing their stake steadily in HDFC Bank. This is a clear signal that the FIIs and DIIs believe that the company is likely to deliver robust earnings in the long run. That’s why they are increasing their stake.
ICICI Bank
When you are looking for the best banking stocks to buy in India for long term then ICICI Bank is one the best bet that you should include in your stock portfolio. ICICI Bank is the second-largest private sector bank that is operating in 17 countries along with India. As of 2021, ICICI Bank is operating across India with a banking network of 5,288 branches. They offer ATM services through 15,158 ATMs across the country.
ICICI Bank has a net cash flow from operation that stands at a whopping Rs. 79,564 Crore for the year ending on March 2020. ICICI Bank has delivered a robust earnings growth of 11% during the past decade. Contrary to the RBI’s report where the gross NPA of scheduled commercial banks was at 9.3%, the ICICI Bank’s Gross NPA is relatively lower at 5.53%.
State Bank of India
State Bank of India is the largest public sector bank in India and 43rd largest bank around the world. State Bank of India is not only the market leader in the deposit and loan segment with a 25% market share but also has a 1/5th market share of the Indian banking sector. The State Bank of India provides banking facilities to over 400 million customers through 15000 branches and over 50000 ATMs.
As of March 2020, State Bank of India’s Total income touched at whopping Rs. 3,68,010 crore, a jump of 11.29% in comparison to the last financial year. State Bank of India is delivering not only a robust earnings growth of 11% for a decade but also has managed to settle the Net NPA at 2.23%.
Kotak Mahindra Bank
Kotak Mahindra Bank started its journey back in 1985. Now it operates through 1200+ branches and 2500+ ATMs across the country.
Kotak Mahindra Bank’s Net Cash Flow stands at 32,815 Crore for FY 2020. The bank has delivered not only a 20% revenue growth but also a 23% spike in profit margin during the last 10 years. The Net NPA of Kotak Mahindra is still at 0.74% as compared to SBI’s 2.23%.
Axis Bank
Axis Bank started its operations back in 1993. It is the third-largest private sector bank. As of 2021, Axis Bank operates through 4,528 branches with 12,044 ATMs across the country.
Axis Bank’s total revenue from operations has touched to 63,716 Crore. The company has delivered revenue growth of 12% and a CAGR growth of 15% during the past 5 years. The Net NPA of Axis Bank is at 0.98%.
IndusInd Bank
IndusInd Bank started its operations back in 1994 with a capital of ₹100 crores by raising 60 crores from Indian residents and 40 Crores Non-Resident Indians. Now IndusInd Bank operates through 2,000+ branches across the country to cater to 2.5 crore customers.
IndusInd Bank’s Net Cash Flow stands at 1,270 Crore for FY 2020. The bank has delivered not only a 27% revenue growth but also a 28% spike in profit margin during the last 10 years. The Net NPA of IndusInd Bank is still at 0.86% as compared to SBI’s 2.23%.
Bandhan Bank
Bandhan Bank started its operations back in 2015. As of 2021, Bandhan Bank operates through 4,701 banking outlets across the country to serve 2+ crore customers.
Bandhan Bank’s total Net cash flow has touched to 2,550 Crore. The company has delivered revenue growth of 40% and profit growth of 41% during the past 3 years. The Net NPA of Bandhan Bank has declined at 0.48% as compared to 0.59% in the first quarter, 2019.
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Hope this article will help you to find the best banking stocks to buy in India for the long-term. When you have got the post helpful, feel free to share it with your loved ones that will help them to invest in the banking sector.