3 Best Undervalued Banking Stocks To Buy in India

If you thought we are going to be recommending the obvious banking stocks like HDFC Bank, IndusInd Bank or Yes Bank, the answer is "no"

Updated: Monday, November 12, 2018, 10:23 [IST]

Banking stocks, especially the government owned banking stocks, have gone nowhere in the last few years. There are some smaller private sector banks, that can offer value at the current levels. Most of the banking stocks, apart from a few like IndusInd Bank, HDFC Bank and Kotak bank have seen severe share price damage. However, at these levels they may look attractive.

Here are a few banking stocks that you could buy.

Union Bank of India

Union Bank of India reported a superb set of quarterly numbers for the period ending Sept 30, 2018. In fact, the bank surprised by reporting a net profit of Rs 139 crore for the period ending September 30, 2018, as against a net loss of Rs 1,531 crore in the year ago quarter.

Net interest income (difference between interest earned and interest expended) increased by about 7 per cent to Rs 2,494 crore (Rs 2,321 crore in the year ago quarter).

The net profit was despite a decline in other income by 26 per cent year-on-year (yoy) to Rs 899 crore due to the 75 per cent y-o-y decline in treasury income to Rs 153 crore.

The best part of the quarterly numbers was the fact that non-performing asset (NPA) accretion slowed to Rs 2,667 crore against Rs 4,652 crore in the preceding quarter. Slippages mainly came from the medium and large enterprises (Rs 1,220 crore) and agriculture (Rs 784 crore).

NPA reduction during the quarter was higher at Rs 3,483 crore against Rs 3,049 crore in the preceding quarter.

Union Bank of India: A value pick

At the current market price of Rs 79, there is a limited downside risk. We believe that the debt resolution through the NCLT, will benefit banks like Union Bank of India, which should see good recoveries going forward.

There is also a possibility that NPAs may have peaked and fresh slippages are unlikely to be as in the past.

The bank also has some value in its subsidiaries, especially the asset management company and the insurance business, where it has a 26 per cent stake.

It would be a good idea to buy and hold the shares of Union Bank of India for at least two years, as the shares could even double in that time.

Check stock quote of Union Bank here

Jammu & Kashmir Bank

J&K Bank, reported a good set of quarterly numbers for the period ending Sept 30, 2018. The net profits of the bank surged 44% to Rs 146.34 crores for the half year ended 30th September 2018.

The Bank had posted a net profit of Rs 101 crores during the first half of previous fiscal. Interestingly, the Bank has now reported six consecutive quarters of profitability after recovering from a loss of Rs 1,632 crores in the financial year ended March 2017.

The gross business turnover of the bank also saw a record increase surpassing the Rs 1,50,000 crores mark with J&K state business contributing more than Rs 1,05,000 crores on the back of robust credit growth of 23% year on year.

J&K Bank: Reducing NPAs

The NPAs of the bank are also showing signs of falling, amidst recovery for the bank. The gross non performing assets for the quarter ending Sept 30, 2018 was 9 per cent, as against 9.83 per cent for the period ending June 30, 2018.

The bank's ability to focus on the retail and SME sector has been bearing fruit and at the same time the focus has been on improving recoveries. The bank is now staying focused on the unbanked areas of Jammu & Kashmir.

The stock of J&K Bank has fallen from levels of Rs 90 to Rs 41.60. The bank can report an EPS of Rs 7 for the year 2018-19. The stock is barely quoting at a p/e of 6 times, one year forward earnings. Also, the price to book value is just 0.44 times. A good cheap stock to but from a 2-3 year perspective.

Check stock quote of J&K Bank here

South Indian Bank

South Indian Bank had great performance for the second quarter ending Sept 30, 2018. During the quarter ending Sept 30, 2018, the company saw a better financial performance, than in the previous quarter ending June 30, 2018.

The net profits of the bank for the quarter jumped to Rs 70 crores from Rs 23 crores in the previous quarter ending June 30, 2018.

The net NPAs also reduced to 3.16 for Sept as against 3.26 per cent from the previous quarter.

The bank has clearly outlined strategies for the coming quarters. It has set up a new retail banking Department to focus on retail loan & liability/investment
products. A sustained focus on CASA and reducing non performing assets will remain a part of the future strategy for the bank.

It plans to granulize loan portfolio to spread out risk, while adopting a cautious approach on corporate lending to reduce risk.

The shares of South Indian Bank are trading near 52-week lows of Rs 14.

South Indian Bank is one bank that continues to be undervalued and is available at a p/e of only 7 times one year forward earnings. The shares are also available with a dividend of 2.53 per cent. This makes the bank a good pick at the current levels.

Check stock quote of South Indian bank here

Disclaimer

The article is not a solicitation to buy, sell in securities or other financial instruments. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article. The author owns shares in Punjab National Bank.