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Banking on Growth

With the sorrows of 2008 are far behind, fund managers bet heavily on banking

Banking is now the most sought after sector amongst fund managers. Among the other equity funds, which includes the equity diversified and tax saving categories, the exposure to Banking was 13.63 per cent of the total assets*, followed by Crude Oil & Natural Gas (10.33%) and Computer Software (7.09%). Worth noting is that this is the maximum exposure to the banking sector in 2010.

As many as 55 funds have an exposure of above 17.96 per cent to banking stocks. In the Sensex, the total weightage to three banking stocks (ICICI Bank, HDFC Bank, SBI) is 17.96 per cent. Interestingly, SBI has the least weightage in the Sensex when compared to the other two, however, it is the most sought after by equity fund managers, followed in preference by ICICI Bank and HDFC Bank.

The number of funds with more than 10 per cent allocated to Banking is higher at 190 funds. In all, 241 funds, which amount to 91 per cent of the equity fund universe, hold an exposure to this sector.

But like any sector, the path has not been smooth. Banking funds delivered -46.85 per cent in 2008 (BSE Bankex: -52.23%). In recent times, Banking hit a rough patch. If one takes a shorter time horizon, the 1- and 2-year returns put FMCG funds in the top slot.

Why is Banking in a sweet spot now? Credit growth is picking up which spells good news for the banking sector. Not too long ago, deposit rates were increased by banks which also increased lending rates, hence spreads are stable. So the sector is seeing a situation where volume growth, which is credit growth, is slowly kicking in, coupled with net interest margins being protected. As economic recovery picks up and growth sets in, the asset quality too will improve, which means non-performing assets (NPAs) won't be that big a concern anymore. Banking is sure in a sweet spot.

But all banks are not equal. Public sector banks were quoting at deep discounts to private sector banks. Fund managers that picked them cheap made a killing. They were growing healthily and had a reasonable Return on Equity (RoE) with NPAs under control. When the catch up with private bank inevitably took place, those fund managers who hopped onto that bandwagon early were fortunate. That discount between public and private sector banks has narrowed considerably so while fund managers are still bullish, everyone is getting very stock specific now.

* The portfolio allocations have been calculated as per the July 31, 2010 portfolios of 264 funds (228 equity diversified and 36 tax-saving schemes).

* The returns have been declared as per September 1, 2010.

Who has the largest exposure?

Over the past 6 months, Canara Robeco F.O.R.C.E has kept an average allocation of 43.19% in as many as 14 banking stocks. This is the highest number of banking stocks in any funds' portfolio. Other funds betting heavily on Banking are IDFC Strategic Sector (50-50) Equity (37.74%), UTI Services Industries (30.39%) and Sundaram BNP Paribas PSU Opportunities (27.44%).

Equity diversified
In this category, IDFC Classic Equity has got the highest allocation to Banking at 23.54%.

7 sector funds: Banking
The average exposure to banking stocks in this category is 77.59% over the past 7 months. The exception being JM Financial Services Sector fund which allocated just 43% of its assets to banking stocks, the rest being in other financial services companies and non-financial industries.