As banking, NBFC stocks are falling are out of favour, MFs are bearing the bruntIf Julius Caesar was an Indian stock investor, the Ides of March would probably be replaced with the Ides of September. In fact, the whole month of September was quite shocking. The market was being assassinated, and like in the case of Caesar, it was an inside job. NPAs, credit risk and contagion are front and centre, and many NBFCs will fold…such scary messages were exchanged on WhatsApp groups as private sector banks and NBFC stocks were singled out by bears for a long-awaited mauling. It’s a tough time for banking and NBFC sector. Are these sectors now a big portfolio risk that you are carrying? Let us find out.


Five top MFs with BFSI Exposure

Fund Name AUM Rs Cr Fund financial exposure % Benchmark financial exposure %
SBI ETF Nifty 50 41244 36.1 36.13
HDFC Equity Fund 22798 35.82 31.44
HDFC Mid-Cap Opportunities Fund 21952 22.64 29.99
Kotak Standard Multicap Fund 21927 36.58 32.96
Aditya Birla Sun Life Frontline Equity Fund 21880 36.99 36.13

The banking and financial sector stocks are important for markets. Apart from earnings growth, these sectors form over 30% of equity MF AUM and account for nearly 40% combined weight in leading equity indices. As PSU banks fell by the wayside under a mountain of bad loans, retail focussed banks and growth-hungry NBFCs became the darlings of investors. As a result, their valuations soared. With liquidity aplenty, the party looked unstoppable. Events like corruption charges brought against ICICI Bank chief were brushed aside.

When a long-time hand of HDFC Bank quit, markets did not bulge. The focus was on economic recovery and the role played by financial institutions. What helped the cause was low-interest rates, which helps financial institutions sell loans cheap. The borrower too thought they were getting a great deal. For the Indian economy, banks are extremely important. While industrial credit demand is still sluggish, retail loan growth and resulting consumption are helping India progress.

How BFSI focused funds’s NAV performed

Fund Name
1-Month 3-Month 1-Year 3-Year 5-Year 10-Year
Aditya Birla Sun Life Banking & Financial Services Fund -17.26 -8.08 -7.3 15.75
Baroda Pioneer Banking and Financial Services Fund -12.1 -6.02 -0.84 9.83 17.09
Edelweiss Exchange Traded Fund-Nifty Bank -9.58 -3.66 5.8
ICICI Prudential Banking and Financial Services Fund -12.81 -3.69 -5.15 15.01 24.34 18.9
IDBI Banking & Financial Services Fund – Regular Plan -6.13 -5.38
Invesco India Financial Services Fund -11.29 -5.8 -1.83 14.4 21.33 16.31
Kotak Banking ETF Fund -9.61 -3.69 5.64 14.44
Kotak PSU Bank ETF -15.6 0.15 -8.3 -3.05 5.73 3.88
LIC MF Banking & Financial Services Fund -15.65 -9.16 -12.88 1.04
Reliance Banking Fund -14.56 -5.4 -2.89 13.09 22.66 17.88
Reliance ETF Bank BeES -9.61 -3.67 5.72 14.28 21.23 16.26
Reliance ETF PSU Bank BeES -15.63 0.18 -8.37 -3.09 5.72 3.88
SBI Banking & Financial Services Fund -13.45 -3.19 5.1 18.58
SBI ETF Nifty Bank Fund -9.61 -3.67 5.66 14.45
Sundaram Financial Services Opportunities Fund -12.31 -7.56 -4.56 9.72 18.17 13.7
Tata Banking and Financial Services Fund -12.75 -9.45 -6.85
Taurus Banking & Financial Services Fund -10.6 -4.76 2.17 10.97 16.48
UTI Banking and Financial Services Fund -15.24 -6.62 -6.74 11.53 19.13 15.08

Default, liquidity issues

When IL&FS defaulted on its loan repayment obligations, the bubble burst. The first full-scale capitulation of such a revered institution sent shockwaves through the financial landscape. Then, there was persistent talk about liquidity challenges at some housing finance companies (HFCs) and NBFCs. The stock market reacted with panic, as the entire NBFC pack succumbed to excessive selling. As the NBFCs recovered amid pep talk by regulators, the government and the companies, the RBI announced the No to Yes Bank MD&CEO Rana Kapoor’s extension. Soon after, the RBI announced a set of restrictions on Bandhan Bank for not abiding by the regulator’s stake dilution norms. In a matter of few days, the finance sector mood has changed from optimistic to pessimistic. In an unrelated event, stocks of listed asset management companies (HDFC and Reliance Nippon Life) have dropped after the Sebi banned upfront commissions to MF distributors and announced new expense ratio norms that make funds cheaper for investors.

Interest rate hike

The growing Indian economy doesn’t need the shock of higher interest rates. But the RBI on October 4 may not have any other option but to raise rates to control the imported inflation thanks to strengthening dollar and rising crude oil price. For interest-rate sensitive stocks, rising rates are not good news at all. For MF investors who have put money in banking equity funds, this is a big risk. There are 18 such banking equity funds alone. A large number of diversified equity funds also have quite sizeable exposure of 20-40% exposure to financials. Rising interest rates will be negative for the holdings of such funds.

The financial services sector has entered turbulent times. After a phase of strong lending growth, many investors are not prepared to accept a change in sentiment. While completely missing out on financials sector is a bad move, fund managers and direct equity investors need to choose their (new) horses for courses. Improving competitive edge due to rising interest rates and tighter liquidity makes large banks with high retail deposits a safer bet. While the banking sector seems to be near the peak of its bad loan issue, high G-sec yields are sure to keep pressure on PSU banks, which rely on treasury income to show some profit.

Large banks and NBFCs with robust operating model, strong and stable franchise, as well as proven management track-record, seem better. In the mad chase for growth, investors have to avoid buying weaker financial institutions even if they look cheap after the recent correction. Try to go for financial stocks that have a strong parentage. It is best to avoid smaller banks and HFC stocks. PSU banks also seem pretty weak, though some of them claim that they are out of the woods. The upcoming earnings season, which kickstarts on October 5, should provide cues supporting this nascent recovery theme.

Staff Writer

This article is written by RupeeIQ editorial staff.