If one were to look at the juggling act of fund managers in the last one year, it is the Financial Services that sizzled and Technology and Healthcare that fizzled. The reason too is pretty obvious; while IT firms are still gasping for breath because of the rupee appreciation and a possible US slowdown, financial services, especially banks, are expected to throw some positive surprise post banking liberalisation in 2009, which is why fund managers are gung ho about these sectors.
The category of diversified equity funds has doubled its exposure to the banking sector during the last one year and has now made it the top sector holding of the category, followed by energy and basic engineering. The category has increased its exposure to the financial services from 8.07 per cent in February 2007 to over 14.62 per cent in January 2008.
Banking funds have risen by 54.17 per cent on an average in the one-year period ending March 05, 2008, which is not only the highest, but is significantly ahead of the second best performer - Equity Diversified, which returned 31.39 per cent. This speaks volumes about its relative out performance of banks compared to the broader market.
Both UTI Banking and Reliance Banking, the two banking specific funds, have given 46.03 and 62.31 per cent respectively. During the last one year also, the BSE Bankex has risen by around 41 per cent, which is much more than the Sensex's 20 per cent rise. The interest towards banking can also be gauged from the fact that two exchange traded funds launched in the last five months, the PSU Bank BeES (launched in October 2007) and Kotak Bank PSU ETF (launched in November 2007), were started specially to cash in on the booming banking sector in the country.
Among the most popular banking stocks, ICICI Bank - India's largest private sector bank and the State Bank of India - India's largest bank, grabbed the lion's share. ICICI Bank, which is the largest private sector bank in the country, is among the top five holdings of as many as 54 equity diversified funds. Over all, as many as 112 funds own the stock. Similarly, State Bank of India was among the top five holdings of 29 diversified equity funds in February 2008. The stock is however owned by 114 mutual fund schemes overall. The bank is the top holding of six diversified equity funds.
So what are the laws of banking attraction? The proposed banking liberalisation is of course is one of them, besides, attractive valuation, especially of public sector banks has also enticed fund managers to bank on banking stocks.
While one can safely assume that private banks have kick-started the process of attaining a sizable size after the HDFC - Centurion Bank of Punjab merger, public sector banks (PSBs) or the government, which is the de facto owner of the PSBs is yet to take a serious note on this issue. Once the government initiates mergers & acquisitions in the PSBs area, which it has hinted earlier, stakeholders will benefit from it.
But as they say, the road to success is always under construction; this banking road too has a lot of potholes and speed-breakers, at least in the short-term. One such pothole was created in the Union Budget 2008-09, by Finance Minister, P. Chidambaram, wherein he waived off agricultural loans worth Rs 60,000 crore ($15 billion), which is a huge amount. Though issues like the extent of damage, who's going to compensate and in what form have yet to be worked out, the banking fraternity has given a thumbs down to the decision. Consequently, the BSE Bankex has fallen more than 10% after the Budget announcement. Another unexpected blow came from ICICI bank overseas operation's marked-to-market loss of over a thousand crore ($264 million); the stock is currently trading at Rs 900.
While these potholes in the near-term might slow the pace, the fund managers and the investor banking on banks are 'Bank on Target'.
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