Top 6 Bank Stocks by Market Cap in 2021 - Analysis of India's Banking Sector

In this article on Top Bank Stocks in 2021, we tell you about the Banking sector, Impact of Covid 19 on the banking sector, RBI’s measures during Covid 19, analysis of top 6 stocks of the Banking sector by market cap and outlook of the banking sector in 2021.

Top 6 Bank Stocks by Market Cap in 2021

In today's article we will talk about such a sector that is not just famous/important for investors. It is also important for any country and its GDP growth. This is the banking sector.

If I start explaining about banking sector in detail then the article will be quite long. But I will try to cover every aspect of the banking sector in this article.

We will give examples of some banks to understand the parameters important for the analysis of banking stocks. We will cover all of this in today's article.

Analysis of India's Banking Sector

Hey friends! Let's divide the article into three parts. In the first part let's talk about the overview of the banking sector. Here we will also talk about recent steps taken by RBI and important reports that will give you an overview of the banking sector.

In the second part, I will discuss about the six stocks that are highly important in India's banking sector. We will discuss the financial parameters that are highly important for any banking stock investment.

At the end of the article, we will try to tell you about the banking sector outlook in the future.

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India's Banking Sector

India's banking sector has 12 public sector, 22 private sector, and 46 foreign banks that operate in India. Besides this, there are 56 rural banks. From here you can understand that India's banking sector is quite huge and there are a lot of different players.

I want to share another interesting fact. In India, there are 1,485 and 96,000 Urban co-operative banks and Rural co-operative banks respectively. In August 2020 India had more than 2,00,000 ATMs. Their projected growth till the end of 2021 is expected to rise above 2,00,000 ATMs and reach 4,00,000 ATMs in one year.

The covid situation left a lot of sectors severely impacted. The banking sector was worst affected due to the entire covid situation. From here we can understand that Nifty has risen from its old levels. But Banknifty has not risen and is trading at the same level. PSU index is still less than the pre-covid levels. Over here you can understand that the banking sector is severely impacted by the covid situation.

The banking sector was not just impacted due to covid but the entire world's banking sector faced negative impact. People were not able to pay their loans as their cash flows were directly impacted. This had an impact not just on corporate companies but the retail sector also had a similar adverse effect. From here you can understand that the entire sector was impacted by covid. To provide relief to this sector and to infuse cash flow, RBI took a lot of steps.

Let's discuss them in detail.

In order to offer relief to the middle-class RBI made an announcement on 27 March 2020. The RBI governor offered a 3-month moratorium to all lenders (who have an outstanding term loan on 1 March 2020)

This moratorium was not just offered to public/private sector banks but was applicable to all rural and urban sector banks. On 22 May 2020, this moratorium period was extended to 1 August 2020. After this, the borrowers approached the supreme court and asked for a waiver of moratorium period interest.

Following this, the Supreme court gave a direction on 27 November to the central government to offer interest waiver to loans till Rs.2 cr and defined 8 categories in this regard. It asked the central government to implement this. These categories were MSME, Housing, and Education. The loans related to these categories were selected for interest waiver.

After this supreme court got another interim order on 3 September 2020 where it declared that the loans non-NPA till 31 August will continue to be non-NPA till the next order. Over here RBI approached the Supreme court to lift the interim order (as they are facing difficulty). This order is still applicable. The loans that were not included in NPA till 31 August are still not included there. 

On 9 September 2020, a report emerged. It was the RBI expert committee's report headed by ICICI bank's chief K.V. Kamath that gave a lot of insights to an investor. I will discuss them now. This report's most important pointer was that 19 sectors were not there under the stress sector before the pandemic. But after pandemic problems started emerging over there. These sectors also turned into stress sectors.

Their total loan amount was Rs.15.5 lakh cr (debt) From here you can understand that the sectors impacted had a huge debt. If a sector has debt and is impacted then it is pretty normal for the banking sector to get affected. Besides this, the expert committee told that retail and wholesale trade was worst affected due to pandemic and they had Rs.5.4 lakh crore as outstanding debt. Besides this the expert committee report also stated that 11 sectors were already under stress and after the pandemic, they faced further pressure and had a debt of around Rs.22 lakh crore.

The NBFC sector that was already under the stress had Rs.7.98 lakh crore stress. From here you can understand that the borrowing sector was severely impacted due to pandemics. On 11 January 2021 (a few days back), an important report emerged where an important aspect was put forward. The name of this report was RBI financial stability report. I will like to discuss this as important pointers emerge out of this that can impact you as an investor.

In this report, the first thing discussed was Gross NPA(Non-performing assets). In plain words, this tells about the money that won't be recovered. In the worst-case scenario, till September 2021 Gross NPA may rise above 14%. One year back this number was 7.5%. This report tells that in the extreme worst-case scenario this number can rise above 14% (when we discuss about Gross NPAs.)

Due to bad debt banks can face a lot of losses. RBI mentions setting aside some amount for maintaining cash flows. For this PCR is used. Its full form is Provision Coverage Ratio. I told you about this in detail. This is the percentage of amount kept aside by the bank to cover its losses (if there are bad debts) This report tells us that PCR has improved to 72% from 66.2% earlier.

The next thing discussed in the report was - Bank credit growth remain subdued i.e. the credit growth of the bank (the money on which the bank earns money) was stable. There was not much growth over there. It was also said that the sector was under stress and the policy measures by any institution were to bring them to the normal level. But they also said that in the coming time it is important to take policy measures towards recovery and growth of this sector besides bringing it at the normal level.

RBI also tried to take the Repo rate at a record low and opened an additional credit line for different banks. If the banks need money they can approach RBI and can use the credit line so that their business receives a great recovery in the coming time. So this was the discussion regarding the entire banking sector.

Top 6 Bank Stocks

Now let's move to the next part of the article where we will talk about 6 banks and we will try comparing them through different metrics. I will not discuss any bank solely as you will not get a clear picture. You will not be able to make an apple to apple comparison.

Six banks that we have chosen are HDFC Bank, Kotak Mahindra Bank, ICICI Bank, SBI, Axis Bank, and IndusInd Bank.

Over here we have first talked about price. I will not like to discuss this. Now let's talk about market capitalization.

HDFC BANK

India's largest bank in this regard is HDFC Bank. Its market capitalization is almost Rs.8 lakh crore.

Kotak Mahindra Bank

Kotak Mahindra Bank's market capitalization is around Rs.3,83,000 cr. A few days back it surpassed ICICI Bank.

ICICI Bank, SBI, Axis Bank, and IndusInd Bank

Now let's talk about ICICI Bank.

Its market capitalization is Rs. 3,76,000 cr. SBI's, Axis Bank's, and IndusInd Bank's market capitalization is around Rs.2.5 lakh cr, Rs.2 lakh cr, and Rs.70,000 cr respectively.

P/E ratio is quite important when we talk about any industry. The P/E ratio of a company is compared to other companies. This tells the price of the company against its earnings. Over here let me tell you that in the case of banks P/B value is more important than the P/E ratio.

Banks have to tell their book value. It is important for you to know the price of the bank against its book value. P/B value is an important metric to compare the entire banking sector. As you can see on screen the P/B ratio of the banks is visible.

The highest P/B ratio is of Kotak Mahindra bank. It is 5.72. After this let's talk about HDFC Bank. Its P/B value with 4.53 number stands at 2nd place. The P/B value of ICICI Bank is around 3.

IndusInd Bank, Axis Bank, and SBI have a P/B value of 2.07, 2.36, and 1 respectively. It means that the book value and price of SBI are equal.

In industries, a low P/E ratio normally means that a business is undervalued. However, considering a business undervalued on basis of the P/E ratio is not right! The P/B ratio is also like the P/E ratio. A low P/E ratio is received well by the investors.

Now let's talk about Return on Equity i.e. the return made by the banks on Equity investments.

The highest return on equity investments is given by IndusInd bank that has an ROE of 14.58%. HDFC bank has an ROE of 16.53%. Kotak Mahindra Bank has 13.67% as its ROE. From here you get an idea about ROE. After returns, the next important parameter is the asset quality of the bank.

If you run a business to lend money then the most important thing for you is chances of recoverability from the party to whom money is lent. Assume that one party doesn't return your money and you have 10 parties. In this case, you don't get money from one party and get it from the other 9 parties. Then your income from those 9 parties will be 0 as one party failed to repay your money. Following this asset quality is also important for banks.

Gross NPA and Net NPA

We will talk about two important parameters related to this- Gross NPA and Net NPA.

Let's discuss the difference between the two. When any company books its NPAs as a loss i.e. provisioning and deducts it from its P/L statement as a loss then net NPA is derived from there. Normally it is considered that low Net NPA and Gross NPA are considered great for a bank. Its asset quality is considered remarkable.

The least Gross NPA is of HDFC Bank. It is around 1.08%. This is the minimum.

After this let's talk about Kotak Mahindra Bank. Its Gross NPA is 2.55%. ICICI Bank has a high Gross NPA of 5.17%.

SBI, Axis Bank, and IndusInd Bank have gross NPA of 5.28%, 4.18%, and 2.21% respectively. Even in the case of Net NPAs HDFC Bank has performed to be the best.

It has a net NPA of 0.17%. After this IndusInd Bank, Kotak Mahindra, and ICICI Bank have net NPA of 0.52% 0.64%, and 1% respectively.

SBI's net NPA is 1.59% and is the highest among all these 6 banks. Now let's talk about the next metric.

It is important for investing in the banking sector. Its name is net interest margin. Now you might be wondering- What is net interest margin?

Assume that I run a business to lend money. If I lend money then I charge 15% interest from that person. But I will also borrow money. I pay 10% to the person from whom I borrow money. The margin of 5% over here is the net interest margin. The high margin will contribute to (more) the bank's income.

Normally a high NIM (parameter) is considered remarkable for investors and banks. As you can see on screen. We have talked about net interest margin.

Over here HDFC Bank's NIM is quite healthy that is around 4.10%. Over here the highest number is of Kotak Mahindra Bank - 4.61%. You can see the numbers of other banks as well. IndusInd Bank and Axis Bank have NIM as 4.16% and 3.58% respectively.

From here you get an idea of the NIM of the banks in the discussion. In 2008 when the financial crisis was on peak Basel 3 norms emerged for the entire banking sector. From there important parameters like the Capital adequacy ratio etc. emerge.

This ratio talks about the assets of a bank. A bank that runs a business in the banking sector is exposed to a lot of risks. In order to mitigate such risks, banks need to keep some money in healthy assets. If there is any problem over here then banks will face huge stress. People who have kept their hard-earned money must be paid back with enough money from banks. Basel 3 norms including capital adequacy ratio were put forward for this.

These are important for the healthy functioning of any bank. Capital Adequacy is the percentage of money that it keeps in safe assets. A high percentage of this is considered great. RBI says that a minimum percentage needs to be adhered to by banks while keeping money for capital adequacy. As you can see on my screen the capital adequacy ratio is visible. All 6 banks have a healthy capital adequacy ratio.

Over here HDFC Bank's capital adequacy ratio is 19.1%. This is one of the highest numbers.

After this Kotak Mahindra Bank, ICICI Bank, SBI, Axis Bank, and IndusInd Bank has 17.9%, 15.6%, 14.72%, 19%, and 16% respectively as their CAR.

Normally this number is more than 12-13%. This is considered a reasonable range. But HDFC and Axis Bank with 19% CAR are considered to hold healthy numbers. So this was the discussion regarding the six banks.

Now let's discuss about the banking outlook. Let's know what can be executed in this sector in the coming time. We can't predict or speculate anything but there is some information that we can share that can be important for you as an investor. High cash flow in a business and economic activity is considered great for banks. The amount lent by the banks will be considered safe when there will be enough cash flow. Also, their credit growth will also increase in the future.

In recent times the central bank has predicted that this year the GDP will contract by 7.5%. (As compared to old projected numbers) Earlier this number was 9.5%. This has number has fallen now. This is a virtuous thing. If the economic activity picks up then improvement can be seen over here. Interest rates are currently at the lowest points. Following this credit growth area has not seen much improvement.

In near future, all these things will depend on business activities. If business activities and credit growth improve then the loan books of banks will expand. This will eventually increase the profit of banks. In the coming time, we will get to know how economic activity improves and its material impact on bank's credit growth.

A report by S&P global tells that the NPA to loan ratio (amount of bad loans as a percentage of outstanding loans) is expected to shoot up to 10-11% by March 2021. In September 2020 this number was at 7.6%. It is an expectation that emerges out of a report of S&P Global.

So this was our entire article on the banking sector. We tried to elaborate on all the points in a detailed and simple manner.

If you invest in any banking stock then you must know about the business, different ratios of banks (important under banking sector) to make decisions as an informed investor.

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