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After hitting 52-week lows in August, shares of the top state-owned banks rebounded sharply this month, with bigwigs such as State Bank of India (SBI), Punjab National Bank (PNB) and Bank of Baroda (BoB) gaining 8-17 per cent. The banking index has gained 14 per cent so far this month after declining 10 per cent in August.
Analysts said most fund managers lost patience in August after holding on for long enough, as these stocks were showing no signs of recovery, squeezing them further in a weak market. The RBI move to squeeze liquidity, which resulted in short-term rates rising sharply, was the trigger point for fund managers selling aggressively.
“After RBI’s July policy, the scenario has changed 180 degrees. Earlier, I had maintained a bucket-buying view on public sector banks. But since then the policy situation has changed dramatically. There is no certainty, non-performing assets (NPAs) are unlimited and there is no visibility of interest rates coming down,” said Vaibhav Agrawal, vice-president (research banking) at Angel Broking.
Two of the country’s largest equity funds, HDFC Top 200 and HDFC Equity, reduced allocation to SBI by 1.28 per cent and 67 basis points of their assets under management (AUM), respectively. Schemes like Reliance Vision and Reliance Equity Opportunities from Reliance Mutual Fund's stable cut exposure to the counter by 1.42 per cent and 68 basis points respectively.
Similarly, several other equity schemes from various fund houses chose to take a cut in their allocation to public sector banks. Schemes like Reliance Growth, UTI Dividend Yield and SBI Contra, among several others, chose to cut exposure in the largest lenders. Many mutual funds continue to hold private sector banks.
Vicky Mehta, senior research analyst at Morningstar India, said, "Fund managers have been trimming allocation to state-owned banks for the last couple of months. These counters have been falling continuously. Any call depends on how much pain a fund manager is willing to take and how the portfolio is structured. I believe many may have been looking for certainty as there was too much of pain."
Credit Suisse, in a report on Tuesday, said it is cautious about the prospects of corporate lenders such as SBI, PNB, BoI, Union Bank, ICICI Bank and YES Bank despite valuations having moderated.
“The banks are currently trading at 20-60 per cent discount to their historical valuations. However, we believe that current challenges are unlikely to be resolved quickly and stock prices may remain volatile in the near term. With loan growth continuing to come from stress segments, asset quality issues are unlikely to abate in a hurry. The stress is being felt by large corporates as well, with an increase in demand for re-financing,” the investment bank said in a report.
