Helping You Build Wealth With Honest Research
Since 1996. Try Now


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

India's Top 3 Smallcap Stocks

**Important: We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
**By submitting your email address, you also sign up for Profit Hunter, a Free-for-life newsletter from Equitymaster,
which offers the most profitable investing ideas in India.


Best Bank Stocks in India

Top Bank Stocks in India

The Indian banking system largely consists of public sector banks, private sector banks, and foreign banks, in addition to cooperative credit institutions.

Access to the banking system has improved over the years due to persistent effort from the Government to promote banking technology and promote expansion in unbanked and metropolitan regions.

The Ministry of Finance launched the Jan Dhan Yojana in 2014, a financial inclusion program to expand affordable access to financial services such as bank accounts, credit, insurance and pensions in all parts of India.

As per the Reserve Bank of India (RBI), India's banking sector is sufficiently capitalized and well-regulated.

Credit, market and liquidity risk studies suggest that Indian banks are resilient and have withstood global downturns well.

Indian banking industry has recently witnessed the roll out of innovative banking models like payments and small finance banks. RBI's new measures may go a long way in helping the restructuring of the domestic banking industry.

Porter's Five Forces Analysis of the Banking Sector in India

Porter's Five Forces is a model that identifies and analyzes five competitive forces that shape every industry.

These are barriers to entry, bargaining power of suppliers, bargaining power of customers, threat of substitutes and competition within the industry.

A change in any of the forces normally requires a company to re-assess the marketplace.

Let us have a look at how these five forces shape the banking sector -

#1 Barriers to Entry

The most attractive segment is one in which barriers to entry are high as they restrict the threat of new entrants.

Conversely if the barriers are low, the risk of new companies venturing into a given market is high.

In the banking sector, barriers to entry are high, due to licensing requirement, investment in technology and branch network, capital and regulatory requirements.

The role of trust also acts as a major barrier to entry for new banks looking to compete with major banks, as consumer are more likely to allow one bank to hold all their accounts and service their financial needs.

#2 Bargaining Power of Suppliers

The bargaining power of customers is the ability of suppliers to put the firm under pressure. Suppliers may refuse to work with the firm or charge excessively high prices for unique resources.

This is low in the banking industry as banks are subject to rules and regulations of the RBI. Customers have also hedged inflation by investing in riskier avenues besides banks.

#3 Bargaining Power of Customers

The bargaining power of customers is the ability of customers to put the firm under pressure. It is high if buyers have many alternatives and low if they have few choices.

In the banking sector, the bargaining power of customers is high, especially for good creditworthy borrowers due to the availability of large number of banks and low switching costs.

#4 Competition

For most industries, having an understanding of the competition is vital to successfully marketing a product.

The competition in the banking industry is high. With entry of foreign banks, competition in the Indian banking sector has intensified.

Banks are increasingly looking at consolidation to derive greater benefits such as enhanced synergy, cost take-outs from economies of scale, and diversification of risks. The RBI has also approved for small finance banks and payment banks which will further increase competition in the industry

#5 Threat of Substitutes

A substitute product uses a different technology to try to solve the same economic need.

This is moderate for banks.

Loans, insurances, mutual funds, and fixed income securities are some of the many banking services that are also offered by NBFCs. Technological developments and the threat of payment method substitutes may also lead to substitution of some of the services provided by the banks

Porters Five Forces Analysis of the Banking Sector in India

Porters Five Forces Analysis of the Banking Sector in India

When to Invest in Banking Stocks

The banking sector has been one of the sectors that has driven the stock market rally in the past decade, giving returns of more than 200%.

Banking stocks are very closely linked to economy as both credit growth and margins are dependent on GDP growth and interest rates.

Banks tend to have high non-performing assets (NPAs) when interest rates are high and economy is underperforming and vice versa.

Therefore, the best time to buy banking stocks is when interest rates start falling as the cost of borrowing for banks goes down immediately while the interest, they charge on loans stays high and falls with a lag.

Key Points to Keep in Mind While Investing in Banking Stocks

Here are some key points to take note of before you invest in banking stocks in India.

#1 Interest Rates

This is the most important factor one must keep in mind while investing in banking stocks.

Since the earnings of banks are highly sensitive to interest rates, it is important to track it.

When interest rates increase, margin spreads tend to expand, as interest income from loans and investments rises faster than interest expense paid to depositors.

However, rising rates expose banks to volatility risks that create a potential mismatch in the valuation of financial assets and liabilities.

Rising interest rates also increase risk of defaults that may arise from borrowers' failure to make the required payments, which can negatively affect the quality of a bank's assets, leading to higher credit loss provisions and lower net income.

#2 Profitability of the bank

While net interest income of a bank tells us how much revenue the bank earned, it does not serve the purpose of measuring how effectively a bank is functioning or truly reflect its asset efficiency.

Hence, one must check the bank's net profit margins.

This will help gauge the extent of operational efficiency as well as capture the nuances of bank's earnings through non-interest income activities and management of their costs.

Here's a list of top banks in India based on their net profit and net profit margins.

Bank Net Profit (Rs in m) Net Profit Margin (%)
HDFC Bank Ltd. 3,81,509 28.1
ICICI Bank Ltd. 2,57,838 27
Axis Bank Ltd. 1,41,644 20.6
Kotak Mahindra Bank Ltd. 1,19,319 35.4
Bank of Baroda 77,002 10.5
Canara Bank 57,951 8.2
Union Bank of India 52,085 7.6
IndusInd Bank Ltd. 48,046 15.6
Source: Ace Equity
Data as of March 2022

#3 NPAs

The biggest fear of any bank is its borrowers defaulting on their payment obligations. A borrower may do so wilfully, or he/she may be unable to fulfil payment obligations due to unforeseen circumstances.

If the payment is overdue for a period of more than 90 days, then the loan becomes a non -performing asset (NPA). This is because the bank isn't earning any interest from the loan.

NPAs beyond a certain limit could damage the fortunes of a bank leading to its bankruptcy.

To avoid such a situation, it is crucial to check the net NPA ratio of the bank. Net NPAs in the range of 1-2% are considered safe.

#4 Return on Equity (RoE) ratio

Return on Equity measures how efficiently a company is using its equity capital. ROE is a gauge of a corporation's profitability and how efficiently it generates those profits. The higher the ROE, the better a company is at converting its equity financing into profits

Here's a list of top banks in India with an RoE of more than 10%.

Bank RoE (%)
HDFC Bank Ltd. 16.7
ICICI Bank Ltd. 15.49
Kotak Mahindra Bank Ltd. 13.19
Axis Bank Ltd. 12.78
The Federal Bank Ltd. 11
IndusInd Bank Ltd. 10.57
Canara Bank 10.03
Source: Equitymaster
Data as of March 2022

#5 Investment in New Technology/Startups

If you look at the history of the financial world over the last 50-60 years, you will see there was hardly any innovation. This is because traditionally the banking sector is very slow to adopt new technologies.

However, with the rise of disruptive technologies like AI, machine learning, and blockchain, the industry is now at the forefront of technological innovation.

Due to this, the banking sector will undergo a massive transformation in the coming years. And the fastest growing entities will possibly be the ones that adapt to this change without compromising on the core of margins and asset quality.

Many banks are investing heavily in their own technology and other startups to catch up with non-banks in the digital banking space. These will be the ones that will be successful in the future.

#6 Valuations

The most commonly ratios for banks are the Net NPA to Advances ratio and Price to Adjusted Book Value ratio, which is the ratio of Price to Book Value adjusted for NPA per share.

Price to Book Value Ratio (P/BV) - It compares a firm's market capitalization to its book value. A high P/BV indicates markets believe the company's assets to be undervalued and vice versa.

To find stocks with favorable P/BV Ratios, check out our list of banking stocks according to their P/BV Ratios.

#6 Dividend yields

There is no consistent trend of dividends across the industry, with different companies having different dividend policies.

For more details, check out the top stocks offering high dividend yields.

Top Banking Stocks in India

The banking sector is in its growth phase with credit growth picking up after the pandemic. The top banking stocks in India can immensely benefit with so many factors positively affecting the industry.

Here are the top banking stocks in India which score well on crucial parameters.

#1 HDFC Bank

#2 ICICI Bank

#3 Kotak Mahindra Bank

#4 IndusInd Bank

#5 Federal Bank

For more details, you can check out Equitymaster's Powerful stock screener for filtering the best banking stocks in India.

List of Banking Stocks in India

The details of listed banks can be found on the NSE and BSE website. However, the overload of financial information on these websites can be overwhelming.

For a more direct and concise view of this information, you can check out our list of banking stocks.

You can also read our banking sector report and check the latest banking sector results.

Best Sources for Information on the Banking Sector

Ministry of Finance -

Reserve Bank of India -

Indian Brand Equity Banking Sector Report -

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

PSU Bank Stocks Are Rising. What Next?

Nov 22, 2022

The PSU Bank index has broken out of the falling trendline indicating an end to the 12-year-long bearish trend.

SBI > Reliance: The King is Dead, Long Live the King!

Nov 12, 2022

SBI has beaten Reliance Industries to become the most profitable company in India. Will it be able to continue its stellar performance?

Why Bandhan Bank Share Price is Falling

Nov 1, 2022

Bandhan is in troublesome waters as its share price drowns due to the after-effects of Assam floods.

The PSU Bank Index is Following in the Footsteps of the Bank Nifty

Oct 18, 2022

For PSU Bank index, the multiple breakouts and reversal signals bullish momentum.

Why SBI Share Price is Rising

Sep 16, 2022

India's largest bank, State Bank of India (SBI), recently crossed the marketcap of Rs 5 tn! These are the key reasons pushing SBI share price higher.

Is there an Upside in the Speculative Kotak Bank - Federal Bank Merger?

Sep 7, 2022

Media reports indicate there is initial discussion between Federal Bank and Kotak Bank for a merger.

Bank Nifty can Lead the Nifty to an All-Time High

Aug 11, 2022

This is why I'm so bullish on banking stocks.

HDFC Bank vs ICICI Bank: Which Bank Stock is Better?

Aug 2, 2022

HDFC Bank reigns over the banking industry. However, ICICI Bank is inching closer in terms of financial performance. Which bank will emerge as a leader?

Why IndusInd Bank Share Price is Falling

Jul 14, 2022

The private lender is under scrutiny after it said the ED has lodged an investigation against certain entities and some bank employees.

Bank Nifty Bulls Are Losing Momentum

Jun 28, 2022

As a trader, the rise towards 33,800-34,000 might be an opportunity for shorts until the index closes above 34,500.

Are Public Sector Banking Stocks Still a BUY?

Nov 14, 2022

Why I believe the rally in public sector banks will continue.

Can HDFC Twins lead Nifty to All-Time High

Nov 2, 2022

The bullish rally in Banking stocks is fueled by HDFC Bank and HDFC Ltd after the initial rally in Axis Bank and ICICI Bank. Can HDFC twins lead the Nifty to all-time high?

Why IndusInd Bank Share Price is Falling

Oct 21, 2022

Here's why shares of the bank fell even as it posted stronger than expected results for the September 2022 quarter.

Nifty 50 is in an Oversold Zone, but...

Sep 27, 2022

Here's what I think the Nifty will do today.

An Option Strategy Nifty Traders Shouldn't Miss Out On

Sep 15, 2022

Options traders can look for strangle short strategy for next week or monthly expiry.

Tamilnad Mercantile Bank's IPO Opens Next Week. Key Things to Know

Aug 30, 2022

All you need to know about Tamilnad Mercantile Bank IPO.

Is it Time to Say "YES" to this Bank?

Aug 4, 2022

Investors are forecasting YES Bank's share price at Rs 100 by the end of the year. Will YES Bank be the best multibagger stock in 2022?

5 Takeaways from HDFC Bank's Q1 Results

Jul 16, 2022

The private lender's NII rose 14.5% YoY to Rs 194.8 bn from Rs 170.1 bn in the same quarter a year ago.

My Contrarian Bet for this Decade

Jul 13, 2022

Looking for a contrarian long-term investment? Your search ends here...

Is this the Bottom for Punjab National Bank?

Jun 23, 2022

Punjab National Bank (PNB) is a huge underperformer. Here's what may happen next...