Yes Bank

With the best asset quality and a strong growth rate, Yes Bank is among analysts' favourite stocks in the segment. At the end of the March 2010 quarter, the bank had a net NPA of just 0.06 %, while operating profits were up by 67.3 % compare to the same quarter last year.

For the whole of FY10, the operating profit was up 63.6 %, while net interest income witnessed an upswing of 54.7 %. Interestingly, despite significant improvement in the CASA, Yes Bank's low cost deposits were at 10.5 %, much lower than large banks. Despite this, the bank had a net interest margin of 3.2 %, which is significantly better than most public sector banks.

Yes Bank has built its expertise in corporate banking and retail constitutes a very small part of its business.

However, going forward, in the second phase of expansion (2010-15), it plans to accelerate its presence in commercial banking and aims to grow its balance sheet from the Rs 36,382 Cr at present to Rs 1,50,000 Cr. In terms of valuation, on a trailing 12-month basis, the stock is trading at 17 times.

Investors entering this stock are advised to take a long term earnings expansion play and not PE expansion.

Why Buy:

Yes Bank: Lowest NPA percentage among listed banks, high growth, healthy NIM in spite of low CASA base.

HDFC Bank

HDFC Bank:

HDFC Bank's stock enjoys the highest premium among the large-cap banks. The reasons are obvious. It has consistently maintained a high growth rate without compromising on asset quality.

Advances have grown by 39 % annually in the past three years. In spite of high growth, its asset quality is still one of the best in the industry, at net NPA around 0.3 % of net advances. The provisioning coverage is also high.

Even though its provisioning policy is conservative (making larger provisions), the growth in profit is high and in the previous 42 quarters, it has maintained around 30 % annual growth in net profits. Because of high CASA deposit (around 50 % of the total deposits), the net interest margin of the bank is high and has helped it report high growth in net profit.

At a price-to-book value of four and PE of 29, the valuation may not rise, but growth in earnings would support the price rise.

Why Buy:

Consistently high growth, lower net NPA percentage compared to its peers, higher provisioning of NPA, large CASA base, high NIM.

Bank of Baroda

Bank of Baroda, or BoB, is a preferred pick in the public sector. A higher concentration in industrialised states such as Maharashtra and Gujarat gives greater push to its business. In FY10, deposits grew 25.3 % over the previous year.

The yearly growth in advances was lower than the previous year, but, at 22.2 %, it was still higher than the average for the banking industry. The asset quality remained high, with net NPA at 0.34 % of the net advances, which is the best among PSU banks.

The bank maintains a strong balance sheet by provisioning 74.90 % of NPAs. Another positive aspect of this bank is the low volatility of its treasury income, unlike other PSU banks, as it categorises most securities as held-to-maturity, which are not marked-to-market as bond yield fluctuates.

Factoring better earning visibility and superior asset quality, at Rs 710, BoB's share is trading 8.5 times its FY10 EPS.

The Bank has declared 150% or Rs.50 per share as final dividend the record date for which is 26-Jun-2010.

Why Buy:
Bank of Baroda: High growth in advances, best asset quality among PSU banks, high NPA provisioning, less volatile treasury income.