Fund managers still prefer private sector banks

Late last month when the government announced its plan to inject Rs 2.1 lakh crore in public sector banks, shares of PSU banks shot up by 20-25 percent in a single session. This also benefited investors in equity funds with significant PSU bank exposure. Saddled with non-performing assets (NPA) and provisions, PSU banks have so far been constrained when it comes to lending. In the absence of credit growth, earnings have also been poor. Apart from the leap in share prices the recapitalisation move also helped improve sentiments towards these government-controlled lenders. Value Research spoke to top fund managers to understand the significance and impact of this move. The common strain during the discussions was that most of them favour private sector banks over their PSU counterparts and not without good reason. No quick-fix Banks being a highly capital intensive sector have a unique characteristic-higher capital attracts more capital and makes business more competitive, creating a virtuous cycle for investors and the bank. Famous investor George Soros terms it as 'reflexivity'. The combination of better earnings profile, improved asset quality, credit pick-up and availability of higher capital post the announcement will result in lucrative stock prices for some or most of these banks. Lending by PSU banks had been greatly affected due to the bad loan situation. They did not have enough capital to lend out and it was a big handicap as their primary job is lending. The government tried to rectify the situation by recapitalisation of the PSU banks. Anand Radhakrishnan, chief investment officer - equity, Franklin Templeton Investments India said, 'Government's recent move to recapitalise PSU banks could likely help tackling and fast-tracking of the non-performing loans (NPL) resolution. This, in turn, should aid private capex recovery and an improvement in the economic activity coming from productive utilisation of NPA assets.' Transmission of rate cuts in the lending rates by PSU banks has been lower in the past due to high provision costs. This may now change and lead to a lower lending cost which in turn can accelerate loan growth and also make the lending market more competitive, added Radhakrishnan. Here is a list of equity funds who gave unbelievable returns on Oct. 25 when bank recap was announced. Oct 25 'bank recap day' top MF winners Scheme Name Category Expense Ratio (%) Oct 25 1-day return (%) Net Assets (Rs Cr) Reliance ETF PSU Bank BeES EQ-BANK 0.49 29.61 68.7 Kotak PSU Bank ETF EQ-BANK 0.49 29.61 168.48 LIC MF Banking & Financial Services Fund EQ-BANK 3.00 13.96 69.25 HDFC Infrastructure Fund EQ-INFRA 2.23 8.87 1179.06 LIC MF Rajiv Gandhi Equity Savings Scheme - Series 3 EQ-LC 2.87 8.55 34.61 LIC MF Equity Fund EQ-MLC 2.82 7.57 329.04 HDFC Equity Fund EQ-LC 2.04 6.38 19600.63 LIC MF Diversified Equity Fund - Series 2 EQ-MLC 2.66 5.26 35.94 HDFC Premier Multi-Cap Fund EQ-MLC 2.53 4.95 303.88 Franklin India High Growth Companies Fund EQ-MLC 2.37 4.95 6715.93 Franklin Build India Fund EQ-INFRA 2.75 4.93 1018.7 HDFC Top 200 Fund EQ-LC 2.05 4.80 14655.42 UTI Long Term Advantage Fund - Series IV EQ-TP 2.62 4.44 162.02 UTI Long Term Advantage Fund - Series V EQ-TP 2.65 4.36 151.51 HDFC Large Cap Fund EQ-LC 2.20 4.27 1234.9 ICICI Prudential Indo Asia Equity Fund EQ-MC 2.55 4.12 172.43 Reliance Tax Saver (ELSS) Fund EQ-TP 1.98 4.10 9113.72 Reliance Vision Fund EQ-LC 2.03 4.05 3278.83 Reliance Capital Builder Fund II - Series C EQ-MLC 2.74 4.03 490.55 ICICI Prudential Growth Fund - Series 1 EQ-MLC 2.61 4.01 103.90   Earnings to drive PSU bank show The government aid will not have a long-term effect on the stock rally of these banks until they leverage it to improve their performance. The earnings performance of PSU banks will finally drive their stock price movements. 'The initial re-rating of the event ha