These five bank stocks appear ready for a bull run

In 2024, despite the momentum in financialisation, the Nifty Bank index has underperformed, rising only 7% compared to the Nifty 50's impressive 15.6% gain. This gap signals investor hesitation, with key banking stocks hovering around critical levels in both the public and private sectors.

However, many banks maintain solid fundamentals and have the potential to outperform in the coming years. Strong asset quality, stable capital positions, and ongoing digital transformations provide a solid foundation for future growth, despite moderating expectations around credit growth and profitability in the short term.

In this article, we’ll explore the top five banking stocks that seem ready for a bull run. Whether you’re a seasoned investor or new to the market, these stocks have the potential for significant returns in the future.

Ujjivan Small Finance Bank

Ujjivan Small Finance Bank (USFB) focusses on financial inclusion for underserved segments, targeting 20% growth in its asset book for FY25.

It is also targeting a 35% secured book by the end of the financial year and actively pursuing a universal bank license.

The bank aims to enhance the quality of its loan book by increasing the proportion of secured loans, recognising that its current mix leans heavily towards unsecured lending at a ratio of 72:28.

It is also restructuring its housing loan product and expanding into new areas such as gold loans, mutual funds, and fintech collaborations. Foreign Institutional Investors (FIIs) significantly increased their holdings in the bank during the June 2024 quarter, boosting their stake to 24.7% from 3.5% in the March 2024 quarter. 

Ujjivan SFB's net profit has increased at a 45% compounded annual growth rate (CAGR) over five years, with a 31% return on equity in FY24.

Bank of Maharashtra

Bank of Maharashtra, a public sector bank, stands out for having the lowest net non-performing assets (NPAs) among both public and private banks, with net NPAs at 0.2% of total advances and gross NPAs at 1.85% as of March 2024.

The bank has significantly improved asset quality, with NPAs dropping from 0.97% in FY22 to 0.2% in FY24, while maintaining a healthy net interest margin (NIM) of 3.9%.

The bank is focusing on expanding its customer base and deepening relationships through special deposit schemes, partnerships with NBFCs, and digital enhancements.

Its net profit has grown at a 23% CAGR over the past five years. Return on equity was 22.8% in FY24, and its shares rose over 18% in the past year.

State Bank of India

State Bank of India (SBI), India’s largest public sector bank, shows strong financial health with robust asset quality and a stable retail loan portfolio.

SBI is well-positioned to benefit from potential rate cuts and the government's capital outlay plans. The bank is also enhancing its deposit mobilisation efforts and digital initiatives, which are expected to drive future growth.

SBI's strong deposit base and low loan-to-deposit ratio position it well for future growth. 

The bank is enhancing its liability franchise by opening around 60,000 savings accounts daily, driven by digital channels and selective deposit rate increases. Its net profit has doubled over the past five years, boosting its return on equity to 20.3% in FY24.

HDFC Bank

HDFC Bank, India’s second largest bank, has been one of the most consistent performers of Dalal Street, having grown at a 20% CAGR for over two decades.

Following its merger with HDFC Ltd., the bank is focused on increasing profitability and expanding its deposit base. The bank's strong franchise, huge synergies, and long runway for growth; makes it a good stock to keep on your watchlist.

HDFC Bank expects strong deposit growth and improved net interest margins (NIMs). The bank's recent performance aligns with these expectations, with deposits up 15% YoY and advances up 7%. MSCI's potential weightage increase could attract significant foreign inflows.

The five year CAGR of net profit stands at 23%, resulting in a return on equity of 22.1% in 2024.

Kotak Mahindra Bank

Kotak Mahindra Bank, one of largest private sector banks, has a strong digital presence and robust financials.

Although its stock has remained flat in 2024, the bank plans to expand its branch network and sustain a high NIM.

The stock declined recently due to the Reserve Bank of India's (RBI's) restrictions on customer onboarding and issuing credit cards. Despite this, the bank is focussed on deepening relationships with existing customers and strengthening its IT systems.

Future plans include geographic expansion (3,000 to 3,500 branches over the next four to five years) and maintaining a competitive deposit base while aiming for a NIM of around 5%.

Kotak Mahindra’s emphasis on digital growth and technological advancements positions it well for long-term success.

The bank's net profit has grown at a five year CAGR of 20%. Its return on equity has averaged 16% over the same period.

Conclusion

Despite short-term caution among investors, India’s banking sector remains full of opportunities. These five banks appear positioned for growth, offering investors a chance to capitalise on the sector’s potential bull run.

While risks remain, particularly around regulatory challenges and economic shifts, investors who carefully track these stocks could reap substantial returns.

Investing in banking stocks can deliver substantial gains, especially when backed by thorough research and a keen understanding of market dynamics. But as always, it's crucial to assess your investment goals and risk tolerance before diving in.

Diversification is key to protecting your investments. By taking a thoughtful approach, you can capitalise on the banking sector's promising opportunities while managing risk.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com