Private sector corporate lenders see a spurt in flows from mutual funds

Fund managers wary of raising bets on state-owned banks fearing government intervention

The private sector corporate lenders are seeing a spurt in flows from mutual funds (MFs), as fund managers expect improvement in asset quality to trigger a positive cycle of lower provisions and higher profits.  

In December, fund houses directed Rs 2,532 crore of flows into ICICI Bank and Axis Bank, which was 22 per cent higher than the flows these banks saw in the previous month. According to data analysed by Prabhudas Lilladher, MFs’ flows into ICICI Bank and Axis Bank accounted for more than two-fifth of the flows that were directed towards the large-caps.  

Fund houses also had a high-consensus ‘buy’ on both stocks. The monthly activity report by the broking house showed as many as 29 MFs raising exposure to ICICI Bank, while Axis Bank saw 25 MFs raising their exposure. By the end of the month, 39 MFs had exposure to ICICI Bank, while 38 had exposure to Axis Bank.  
 

However, fund managers are wary of raising bets on state-owned banks, even though their asset quality is likely to benefit from the ongoing resolution process under the Insolvency and Bankruptcy Code (IBC). 

“PSU banks have the lowest conversion cycle from pre-provisioning operating profit to profit. Any cut in provision will straightaway translate into their pre-provisioning profits,” said a fund manager, requesting anonymity. 

According to him, with the yields coming off, they will make the largest gains on their treasury books. 

However, government intervention through farm-loan waivers or Mudra loans to MSMEs could negate the gains these banks make on their financial health.

Meanwhile, analysts see a re-rating for ICICI Bank on the cards. “We believe ICICI Bank is well-geared for the next cycle with improved traction in quality asset growth, a robust CASA franchise, efficiency gains, and improved net interest margins (amid rising pricing power as competition slackens in a tight liquidity environment),” analysts at Edelweiss said in a note. 

The bank could see some challenges. Analysts expect near-term pressure on margins on account of the change in loan mix to lower yielding retail products, and due to the time lag in re-pricing of loans and deposits.  

Analysts have also built in positive estimates for Axis Bank. “Although a spike in slippages remains a possibility in the short term, we expect asset quality to improve in the long run. We have factored in slippages of 2.3 per cent over FY18-21E,” said analysts at HDFC Securities. 

Axis Bank’s valuation multiples have been bogged down on account of a wide range of factors over the last few years. 

Some of these are related to the piling up of bad assets, the Reserve Bank of India’s intervention on extension of top leadership, and charges of non-compliance at the branch level during demonetisation. 

However, analysts say that as the stock steps out of these hurdles, and positives from better asset quality and more granular business profile play out, the bank should see a re-rating.  

Analysts at HDFC Securities have pegged the target price for the bank at Rs 718, which puts the stock at a price-to-book of 2.5 times. The stock has largely traded at two times in last few years, analysts pointed out.