"Banking stocks will outperform in the medium term"

The BSE Bankex has outperformed the Sensex by a large margin over the one-year span. The banking sector is likely to continue doing well in the medium term as well, says J Venkatesan, equity fund manager at Sundaram BNP Paribas Mutual Fund who manages the Financial Services Opportunities Fund at the fund house. In particular, he is bullish about the prospects of public-sector banks which, he says, offer good growth prospects and are also available at attractive valuations. Excerpts from an interview with Sanjay Kumar Singh: On August 16, 2010, the Sensex showed a one-year return of 22 per cent while the BSE Bankex showed a one-year return of 52 per cent, amounting to an outperformance of 30 percentage points. What are some of the reasons for this outperformance? There are many reasons for this outperformance. The financial sector is a clear proxy for India's economy. With the economy turning buoyant, the sector got re-rated more. The sector did underperform significantly during 2008 on account of the global financial crisis, farm loan waiver, and credit concerns. Hence with the environment improving it did some catching up. Now the credit cycle is behind us and even the interest-rate cycle is getting near the peak. Further, Indian financials have shown good earnings growth along with loan growth. On the other hand, global financials have shown loan book growth but not significant earnings growth due to severe strain on their profitability. Further, state-owned banks have undergone a structural improvement in performance over the years. They have started exhibiting growth rates similar to tho