Top 5 cheapest bank in India

By Ekta Sonecha Desai

India’s banking sector is expanding at a rapid pace. With rising financial inclusion and digital penetration, banks are becoming drivers of the country’s economic growth. For investors, this sector is full of potential. Banking stocks, if selected carefully, can deliver consistent growth and long-term wealth generation. It could be a wise move to include banking stocks in your portfolio.

But choosing the best stock is half the battle. You need to ensure you’re buying it when it offers the best value.

This is where valuation ratios are used. One of the methods of determining if a banking stock is properly valued is by looking at its Price-to-Book Value (P/BV) ratio.

#1 Karnataka Bank

Karnataka Bank is engaged in providing a wide range of banking & financial services involving retail, corporate banking and para-banking activities in addition to treasury and foreign exchange business.

Karnataka Bank is currently trading at a P/BV ratio of 0.6x, making it an attractive value pick. It is trading slightly below its 10-year median of 0.7x.

Axis Securities has given a buy rating with a target price of Rs 255, implying a 49.1% upside from the current market price of Rs 183.

The bank reported an ROE of 9.6%, ROA of 0.9%, and net non-performing asset (NNPA) of 1.4% in Q3FY25. Gross NPA stood at 3.1%, down 53 bps YoY, while the provision coverage ratio (PCR) stood at 80.6%.

The bank reported a 4.9% QoQ decline in its net interest income. However, bank remains focused on expanding its high-margin retail lending portfolio.

Karnataka Bank has been actively shifting its portfolio towards high-margin retail lending, reducing its reliance on lower-yielding large and mid-corporate loans. According to Axis Securities, this transition, though impacting short-term profitability, is aimed at improving long-term earnings stability.

The brokerage also believes that bank has also focused on reducing its dependence on bulk deposits, bringing their share down to 7.1% from an earlier average of approximately 12%, thereby improving deposit stability and lowering funding costs.

#2 Bank of India

Bank of India is a public sector bank in India. Segments of the Bank are treasury operations, wholesale banking and retail banking.

Treasury operations segment comprises the whole investment portfolio, which is trading in government and other securities, money market operations and foreign exchange operations.

Bank of India is trading at P/BV ratio of 0.6 times which suggests it might be undervalued. It is trading above its 10-year median P/BV of 0.4 times.

Bank of India is likely to continue on a steady growth path, aided by better asset quality and a strong capital base, says Geojit BNP Paribas. The brokerage has placed a target price of Rs 121, indicating a possible upside of 23.7% from the current market price.

During Q3 FY25, the GNPA ratio of the bank fell to 3.7% from 5.4% as of December 2023, and the NNPA ratio fell to 0.8% from 1.4% during the same period, evidencing better asset quality. The Provision Coverage Ratio (PCR) also increased appreciably to 92.5% from 89.9%, illustrating a better cushion against future loan losses.

As per Geojit BNP Paribas BOI has strategic emphasis on improving operational efficiency, growing its loan book, and upholding robust compliance and corporate governance practices. Nevertheless, the broker advises caution due to fluctuations in asset quality.

#3 RBL Bank

Founded in 1943, RBL Bank is a banking firm involved in the business of offering specialized services through five business segments namely corporate banking, commercial banking, branch & business banking, retail assets and treasury & financial markets operations.

The bank is trading at P/BV ratio of 0.7 times, hence it is an interesting option for investors who seek undervalued stocks. It is trading below its P/BV ratio 0.9 times.

Motilal Oswal has put a target price of Rs 170, suggesting an upside of 6.5% to the current market price. Q3FY25 PAT fell 86% YoY owing to increased provisions and slippages in microfinance, while NIM narrowed 14bps QoQ to 4.9%

Gross NPA of the bank increased to 2.92%, whereas Net NPA stood at 0.5%. PCR was at 82.2%, tightening its provisioning buffer. RoA dipped to 0.1% and RoE to 0.8%, indicating strain on profitability. In spite of setbacks, RBL Bank is keen on retail growth and fee income expansion.

RBL Bank’s earnings are likely to remain under stress in the near term as there is ongoing stress in the microfinance book, as per Motilal Oswal. Despite that, the bank continues to stay committed to growth in secured retail lending and improving collection, which may drive earnings recovery over the medium term.

#4 South Indian Bank

Founded in 1929, South Indian Bank was the first ‘scheduled bank’ among the private banks of Kerala. It has a strong presence in south India and specifically in Kerala.

South Indian Bank offers retail and corporate banking, para banking operations like debit card, third party distribution of financial products, along with treasury and foreign exchange business.

South Indian Bank is trading at a P/BV of 0.7x, making it a value investment opportunity. It is trading at par with its 10-year median P/BV.

Geojit BNP Paribas has a target price of Rs 27 on Geojit BNP Paribas, which is a 13% premium to the current market price of Rs 24.

During Q3 FY25, South Indian Bank enhanced its asset quality with Gross NPA decreasing to 4.3% lower by 44 basis points (bps) YoY and Net NPA reducing to 1.2% lower by 36 bps YoY. The PCR increased to 71.7%, higher by 465 bps YoY, indicating a better cushion against possible loan losses.

The bank’s profitability continued to be in line during Q3 FY25 with RoA at 1.1% and RoE at 13.9%.

As per Geojit BNP Paribas, South Indian Bank is likely to continue steady growth on the back of quality lending and a better CASA mix. The broker is expecting credit growth of 12% in FY25-26, with increasing contribution from higher-yielding assets and declining slippages. Due to this, bank’s ROE is likely to be around 13% by FY26.

While the long-term view is positive, the brokerage is expecting moderation in advance growth over the next quarters.

#5 Tamilnad Mercantile Bank

Established in 1921, Tamilnad Mercantile Bank is a private sector bank in India that is among the oldest. It provides a range of banking and financial products to retail customers, micro, small, and medium enterprises (MSMEs).

The bank is trading at P/BV ratio of 0.8 times, hence an attractive candidate for investors in search of undervalued share. It is trading below its 10-year median P/BV of 1.1 times.

During Q3 FY25, Tamilnad Mercantile Bank’s GNPA ratio decreased to 1.3% from 1.7%, and the NNPA ratio reduced to 0.4% from 1%, pointing towards better asset quality. The PCR also registered a substantial increase to 69.1% from 41.9% as it is a bigger cushion against the probable loan losses.

Also, the Capital to Risk-Weighted Assets Ratio (CRAR) rose to 29.3% from 25.9%, reflecting a strong capital position. These enhancements reflect the bank’s efficient risk management and operational effectiveness in the quarter.

During the Q3 FY25 earnings call, Tamilnad Mercantile Bank management presented strategic plans to drive future performance. The bank will strengthen its digital presence, emphasising mobile and internet banking channels to enhance customer experience and operational effectiveness.

Conclusion

Low P/BV banking stocks can appear to be tempting, but valuation is not enough to ensure a good investment. Although a lower P/BV ratio can be a sign of undervaluation, it is important to evaluate the bank’s overall financial position, asset quality, growth opportunities, and risk factors before making an investment.

Conditions like increasing NPAs, falling profitability, or poor business fundamentals can overrule the advantage of low valuation.

Investors need to examine important parameters such as return on equity (RoE), return on assets (RoA), credit growth, and provisioning buffers to ensure that the bank is strong at its core and has the ability to create long-term value.

Moreover, knowledge of the future direction and management vision is necessary to quantify whether the bank is capable of maintaining growth and overcoming sectoral issues.

Ultimately, investing in banking shares is all about finding the right balance—a mix of valuation, financial solidity, and growth prospects in the future. Though low P/BV bank shares may look appealing, it is essential to make a sound research-based investment strategy to take decisions.

Disclaimer:

Note: We have relied on data from www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.

Ekta Sonecha Desai has a passion for writing and a deep interest in the equity markets. Combined with an analytical approach, she likes to deep deep into the world of companies, studying their performance, and uncovering insights that bring value to her readers.

Disclosure: The writer and his dependents do not hold the stocks discussed in this article.

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