Should I Invest in Banking Stocks?

Posted on July 13, 2020 by Benchs

4 min read

Banks are the financial institutions that lend to the various industries and businesses so that they can survive. If the banking sector sinks, the entire economy will be in danger. Hence, by nature, the banking sector is the lifeline and the most important sector in our economy or any other economy for that matter. Banks, therefore, dominate the financial sector stocks list.

Nature of the sector

As a sector banking is bound to be impacted by factors such as macroeconomic conditions, interest rates, decisions, and announcements by the Reserve bank of India which is the central bank of our country. However, the most important factor that impacts the functioning of the sector is the loan servicing behavior of the debtors. Cash is the bread and butter for the banking industry. If there are more defaults and more people not repaying their loans, it will become difficult for the banking industry to survive. If banks have less money, they cannot lend money to others or lend at expensive rates, the economy will not run efficiently.

Why to invest in the banking sector?

You can invest in the banking sector. Investment in this sector is never outright no because investing in the banking sector is equivalent to participating in your country’s growth story but the research here will require a bit more homework. You will have to look at each and every bank, their historical performance, and if there has been any history of fraudulent scams.

Private or public bank?

Your job does not get done with just finding an answer to why to invest in the banking sector. There is a private banking sector and public banking sector which have their own factors that are unique to them apart from the bigger factors that impact banks in general. The reason being government banks are government-backed and have much lesser to minimal chances of completely shutting down due to bankruptcy, the government is bound to intervene. With private banks, yes, the RBI does intervene, like in the case of Yes Bank recently but it is not a certain future.

The catch here is that private banks generally return higher than public sector banks in the market.

This is the general rule. Higher the returns, the higher the risk.

Let’s look at some of the banking sector stocks:

HDFC Bank:

In the longer run, this is one of the highest returning private banks. HDFC Bank is one of the oldest private banks in India founded in 1994 and being headed by Aditya Puri ever since. The bank along with its other HDFC twin, HDFC Ltd, a housing finance company have led the large-cap markets for a long time. Both investors and customers have trusted the bank with its business and the same is visible in its stock growth as well. It has a market cap of over Rs 5 lakh crore and has returned over 400% in the last 10 years. This is indeed one of the best bank stocks to buy now in India.

Axis Bank:

Axis Bank is also one of the firsts in the private banking sector. It was set up in 1993. The stock has not beaten the benchmark in the long term but has given a decent enough run for your money. The stock has returned over 70% between 2010 and 2020. The bank has a wholly-owned subsidiary in UK known as Axis Bank UK

Kotak Mahindra Bank:

Kotak Mahindra Bank tops the list of private banks in case of long term returns. It has been able to garner a good set of customers with smart marketing and intelligent advertising. Between 2010 to 2020, until June ‘20, the stock returned over 500% to its investors. This makes Kotak Mahindra Bank one of the best bank stocks to buy now in India.

IDBI Bank:

IDBI Bank is also a private sector bank incorporated in the early 2000s. The IDBI bank share price shows that it is one of the cheaper stocks on the exchanges. Its market cap was a little above Rs 33,000 crore in June 2020.

PSU Banks

Bank of Baroda:

If you look at the Bank of Baroda share price, you will realize it is one of the cheaper stocks among the other PSU banks in the market. Last year Dena Bank and Vijaya Bank merged into Bank of Baroda making it an even larger entity. This was done as one of the government’s disinvestment initiatives. Incorporated long back in 1911, the bank was listed on the exchanges in 1996.

SBI:

No banking discussion can take place without the State Bank of India. It is the country’s largest lender and largest reach of branches in urban and rural areas of the country. SBI was incorporated long back in 1806. This is one of the important banking sector stocks in India.