Banking stocks have had an excellent run in the last one year. Investor interest was kindled by hopes of a revival in industrial and investment activity leading to increased lending and credit growth, improvement in corporate earnings and fewer defaults, as well as expectations of big-bang reforms at the Centre.
Ground reality
Against this backdrop, SBI Mutual Fund launched a new open-ended scheme last week — The SBI Banking and Financial Services Fund.
While markets are optimistic, the actual performance of banks is hardly cheering. In the last one year, bank loan growth has slipped to five-year lows, owing to lack of fresh investments and delayed turnaround in capex cycle.
However, within the banking space, private banks have continued to prove their mettle. PSU banks, on the other hand, have seen their earnings shrink on the back of muted loan growth and ballooning bad loans amid valuations of PSU bank stocks having nearly doubled purely on revival hopes.
But there are a few reasons that make a case for investing in sound banking stocks for the long-term investor. One, GDP growth is set to pick up and there is now a more benign interest rate environment.
Two, new banking licenses will usher in innovation and more competition in the sector, with differentiated models such as payments banks and small banks widening the scope of opportunity.
Three, the promulgation of the ordinance on insurance law, which among other things proposes to increase the FDI in the insurance sector to 49 per cent from 26 per cent, is likely to rouse investor interest. For many conglomerates in the financial services space, this is likely to unlock substantial value in their insurance subsidiaries.
Room for cherry-picking SBI Banking and Financial Services Fund will invest across the financial services spectrum — banks, rating agencies, NBFCs and HFCs among others.
The fund is benchmarked against the CNX Finance index, more than 60 per cent of which comprises of three stocks — HDFC, HDFC Bank and ICICI Bank. The fund thus has enough room to outperform the index by diversifying.
But all said, betting heavily on cyclical sectors such as banking does entail a higher risk. Hence the scheme is only suited for investors with a high-risk appetite.