Demonetization has led to banks getting windfall low-cost deposits, which has created significant headroom for banks to on-lend profitably
With PSU banks given a meagre allocation in Budget, there has been a lot of buzz around banking stocks. The Reserve Bank of India (RBI) has also paused on lowering lending rates further. Does all this change the investment opportunity in banking funds, one of the largest sectoral themes with as many as 17 schemes managing investor money worth Rs 10,000 crore? Fund managers told DNA Money that banking funds, which have delivered an average 46% gain in the last one year, will remain evergreen.
Banking and financial services mutual fund schemes try to generate solid returns by putting money in shares of companies in the banking sector, and also in companies engaged in allied activities related to the main sector. So, they invest in both private sector lenders like ICICI Bank, HDFC Bank, as well as state-run banks like State Bank of India and Bank of Baroda. Additionally, non-banking financial companies (NBFCs), housing finance companies (HFCs), and broking houses too are part of such portfolios.
Steady inflows in banking funds has led to tremendous in-growth of assets for schemes like Reliance Banking Fund (AUM of Rs 2329 crore), Kotak Banking ETF (over Rs 2300 crore), ICICI Prudential Banking and Financial Services Fund (Rs 1362 core) and Birla Sun Life Banking & Financial Services Fund (above Rs 870 crore).
Demonetization has led to banks getting windfall low-cost deposits, which has created significant headroom for banks to on-lend profitably. Further, benign interest rates would enable credit growth to kick start and benefit bad loans on account of lower-interest outgo. Since banking sector is the backbone for any economy, the sector is the key beneficiary as well catalyst of economic recovery. The sectors offers an interesting play on consumption and capex revival themes. While consumption gets a boost from various initiatives, capex revival is yet to show discernible signs of coming back.
In the past twelve months, banking funds have given average 46.19% gains, which means Rs 1 lakh invested has become Rs 1.46 lakh. Kotak PSU ETF has clocked 74% rise, followed by R*Shares PSU Bank BeES (73.76%), ICICI Prudential Banking and Financial Services Fund (65.78%), Birla Sun Life Banking & Financial Services Fund (55.96%) and LIC MF Banking & Financial Services Fund (54.6%) leading the charts. Over longer duration i.e. three years, banking funds on an average have gained over 27% every year i.e. doubling investors' money.
Experts feel there is nothing wrong with the Budget giving a lower allocation to PSU banks. Shrey Loonker, fund manager, Reliance Mutual Fund, said, "It is worthwhile to note PSU banks have substantial non-core assets and significant unrealised gains on the bond investment book, which can help provide for bad loans and shore up capital, leading to less dependence on government for funding."
He also feels RBI's pause on lowering interest rates may be transient.
"RBI is in a pause mode on interest rates due to the global fragile environment and evolving inflation trends. However, the yield curve is also based on demand-supply equation of money and we believe the liquidity situation would remain very comfortable, especially after demonetization, which has led to additional liquidity with banks, leading to benign interest rates over the medium term," Loonker added.
Arguably, banking as a sector has solid opportunities for long-term investors. With a regulator like RBI watching over, financial services industry is on a tight leash as well. With economic growth picking up sustainably, banking companies are projected to be the first off the block when the growth rate acclerates, say experts.
Sonam Udasi, fund manager, Tata Mutual Fund said, "The Indian financial services is at a cusp of tremendous growth opportunity led by...one, policy focus on enhancing the share of financial savings within the population via disincentive parking of savings in hard assets like gold and realty. Two, focus on more through the system and expansion of tax pool enhancing trackable savings pool which would give the industry more resources to allocate for newer avenues for investment. Three, a younger digitally inclined is likely to give rise to innovative business models within the financial sector."
With India aiming for a higher GDP growth, the financial sector would be able to give a multiplier effect over the next few years, Udasi added.
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