Whenever an economy rises from an abyss, the outlook of banking stocks improves by leaps and bounds. That is happening with India, which is gradually coming out of the shadows of the pandemic-led recession. As of late 2022, the banking industry is seeing golden days as credit growth and deposit growth rates have soared to the mid-teens, shrugging of years of slow growth. The biggest beneficiaries of this credit growth are private banks.
No wonder analysts are bullish on banks like Yes Bank, Kotak Mahindra, and ICICI Bank share. However, given so many private banks are performing well, which should help an investor pick? The answer to this question lies in specific essential parameters that may allow investors to discern gainers from losers.
Credit growth: This metric tells how much more the bank has been lending. Since banks earn from interest on loans, so more is better. Look for banks with best-in-class credit growth.
Deposit growth: It is simply the increase in fixed deposits opened at banks. These deposits are the cheapest way for banks to raise funds and loan them to borrowers. Look for banks with best-in-class deposit growth.
P/B value: Price to book value is the valuation metric used to compare banking stocks. Book value is, crudely speaking, all loans minus all deposits, and thus is the value that will be generated if a bank is liquidated today. P/B measures how much an investor is willing to pay for a bank compared to its book value. Less is better.
Asset quality: Nonperforming asset is a ratio of bad loans compared to total loans. Lesser the bad loans, the more efficient a bank is in lending and collecting its dues.
In essence, you should look for banks with high credit growth, low P/B value, and NPA. Let us discuss the mentioned private banks that have been performing well recently concerning the stock price and compare the best bet.
YES Bank: As of June 2022 numbers, the bank has recorded credit growth at 14% and deposit growth at 18%. After a stellar run during 2022, the bank’s stock trades at 1.19 times its book value. However, the bank has a comparatively high concentration of bad loans.It has transferred much of the bad debt to an asset reconstruction company that will make its book healthier.
ICICI Bank: It is enjoying best-in-class credit and depot growth as of June 2022. Loan growth in retail and business categories has been over 20%. Deposit growth was close to 20%. Asset quality is also excellent. Thanks to the efficiency shown by the bank, the ICICI Bank share price trade at 3.78 times its book value, which is at a relative premium. Nonetheless, analysts continue to be bullish on the counter.
Kotak Mahindra Bank: As of June 2022, its credit growth was also 20%,but its despot growth was relatively lower. The bank also does not have substantial bad loans as per its quarterly results. However, at 5.19 times its book value, it is among the most expensive private bank stocks, which makes some analysts nervous. However, analysts at ICICIdirect have a ‘buy’ rating on the bank with a target price of Rs. 2,200.
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