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Banking shares are back in India's equity fund managers' radar at the beginning of second half of the current financial year. With Q2 results in line or slightly better than expectations amid initial signs indicating bottoming out of country's economy, fund managers waited no more to reverse their stance on the sector.
In October, allocation of equity assets to banking stocks zoomed by more than 200 basis points (bps) to 17.77 per cent. (One basis point is hundredth of a percentage point).
This is a significant increase while considering the pace with which fund managers cut their exposure to banks. For instance, since May till September this year, fund managers rushed to cut their allocations by a massive 4.35% - primarily in the state-owned banks amid rising concerns on asset quality.
However, situation seems to have changed since then and fund managers do not want to lose out in case financials rally.
Nandkumar Surti, managing director and CEO of JP Morgan Asset Management (India), says, "Markets were expecting Q2 results to be worse which, however, turned out to be better. On top of it, global developments are also proving positive for India. Concerns regarding non performing assets (NPAs) is gradually reducing."
Agrees, fund manager at one of the largest fund houses. "We are buying banks - private as well as PSUs. Valuations are quite cheap even at today's prices."
| Allocation of equity assets to banks | |
| Month | Allocation (%) |
| Apr | 20.84 |
| May | 20.10 |
| Jun | 19.63 |
| Jul | 16.93 |
| Aug | 15.70 |
| Sep | 17.75 |
| Oct | 17.77 |
| Source: Sebi |
After knee-jerk reactions in July this year post RBI's tightening measures, banks are relatively stable and so is witnessed in their share prices. Shares of State Bank of India, the country's largest lender, had gone crashing to hit a 52-week low of Rs 1,452 in August. On Friday, it closed at Rs 1,821.50 - a rise of over 25 per cent against its year's low level. Same is true with many of its peers - in private and public sector. Since July, BSE's Bankex has gained a little over 11 per cent.
Kaushik Dani, equity head at Peerless Mutual Fund, says, "Financials tend to better when economy revives. Whether it is private or public banks, all benefit. I feel there are early indications of economy's bottoming out."
According to Surti, those who have been under-weight on banks are adding more exposure. And it's combination of both - private as well as state-owned banks."
Fund managers admitted that the current month will continue to see the same trend as they are banking on banks.
However, there is word of caution too. Vetri Subramaniam, chief investment officer (CIO) at Reliagare Invesco Mutual Fund, says, "Banks had reacted negatively in July-August on the back of RBI's tightening. Last two months have seen situation coming back to normal. But concerns regarding NPAs remain there and I continue to remain cautious on the sector. There are better avenues other than banks available."
