Domestic fund managers' exposure to private banks hits 20-month low in May

Exposure to private lenders at a 20-month low; weighting declines 400 bps YTD

Domestic mutual fund (MF) managers’ preference for private banks has been no secret — more than a fifth of every penny deployed in the stock markets went into private lenders. But, many large fund managers, of late, are tempering their expectations from this space. 

In May, equity MF exposure to private banks hit a 20-month low — 16.7 per cent of assets under management (AUM). The weighting has seen a decline of nearly 440 basis points on a year-to-date (YTD) basis, the data provided by Motilal Oswal Research shows.

Though banking and financial remains the sector where most MF assets have been deployed, fund houses' dependence on this space has come off sharply this year with others, such as pharmaceuticals, auto, and telecom, witnessing an increase in weighting.

Though banking stocks have seen a sharp jump in recent weeks, they remain laggards on a YTD basis. Both BSE Bankex and Nifty Private Bank indices are down 34 per cent in 2020. In comparison, the Sensex is down 15 per cent.

This underperformance has partly contributed to the reduction in the banking sector exposure. "For the first time in recent years, the banking industry is going through a tough time. Credit is growing at 6 per cent, but that's because of the stimulus package. Second, because of the moratorium,  bad loans will rise. The emerging fundamentals support the shift away from private banks. At the same time, there are opportunities in other sectors. Pharma and health care are necessities, which are in high demand during this Covid-19 period. One will be very cautious about private sector banks in the next three to six months," said G Chokkalingam, founder and CIO, Equinomics. 

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Many are wary of investing in banking stocks at this juncture because of their close linkages to the economy. As the economy is expected to contract this financial year, bank financials are likely to be hit. “The banking sector takes a hit in terms of growth and quality of assets when the economy goes through a period of de-growth,” said Chokkalingam. Overall, banking exposure is down from 25.3 per cent at the start of the year to 18.7 per cent in May, the data on Sebi’s website shows. Similarly, exposure to financial stocks is down from 10.24 per cent to 8.81 per cent during the same period.

"Because of the slowdown, bad loan worries will come back. Jobs have been hit and this has affected the repayment capability of people to an extent. The hit could be not just at the profit level but also the asset quality level. On the other side, pharma has done well and in this environment, with the pandemic, a lot of fund managers are shifting their allocation to pharma," said Jyotivardhan Jaipuria, founder, Valentis Advisors.

If one can wait out the painful period, banking stocks are still good investment bets, say experts. “We are still bullish on private sector banks. We think some of the larger private sector banks will be gainers from this Covid crisis because people will now want to invest their money in safe assets. Fixed deposits in private sector banks will go up. Once they get more deposits, their ability to lend will increase. 
 

Private sector banks are well capitalised, and some of them have raised capital. The next two quarters will be tough for the banking sector. Over the next few years, they will do well,” Jaipuria added.