Banking stocks have been outperformers over past few months on the back of strong credit demand and lower non-performing asset (NPA) write offs. They have outpaced Nifty since June-end onwards from where the market touched its 52-week low and turned around.
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Given that, mutual fund investors must be wondering if they should take a plunge in banking funds?
For the uninitiated, banking funds are open-ended equity funds that invest only in the banking sector. The portfolio of these funds consists of both private and public sector banks. Private sector banks such as ICICI, HDFC, Kotak, Yes, IDFC, IndusInd, etc, are a part of the portfolio.
A look at recent performance of banks
Both public sector undertaking (PSU) and Private Banks have relatively outperformed Nifty in each of the last three month i.e. July-September.
Even on year-to-date (YTD) basis, while Nifty is down by 4 percent, banking sector gained by four percent, said Sneha Poddar, AVP Research, Broking & Distribution at Motilal Oswal Financial Services while talking to CNBC-TV18.com.
Though PSU and private banks both beat Nifty, among them, PSU banks outshined with gains of 11 percent vs 3 percent gains in case of private banks.
Here’s a table showing 3-month and 1-year return of private banks:
| Company Name | 1 Year | 3 Month |
| AU Small Finance | 563.8 | 621.9 |
| 3.68% | -6.01% | |
| Axis Bank | 796.55 | 637 |
| -10.07% | 12.46% | |
| Bandhan Bank | 286.6 | 276.45 |
| -11.37% | -8.12% | |
| City Union Bank | 150.55 | 136.95 |
| 12.92% | 24.13% | |
| CSB Bank | 305.6 | 199.9 |
| -28.08% | 9.95% | |
| DCB Bank | 91.8 | 76.9 |
| 12.42% | 34.20% | |
| Dhanlaxmi Bank | 15.8 | 11.7 |
| -25.19% | 1.03% | |
| Equitas Bank | 61.1 | 39.55 |
| -22.34% | 19.97% | |
| Federal Bank | 80.9 | 91.75 |
| 38.32% | 21.96% | |
| HDFC Bank | 1615.95 | 1345.65 |
| -14.09% | 3.17% | |
| ICICI Bank | 717 | 710 |
| 18.44% | 19.61% | |
| IDBI Bank | 44.55 | 31.25 |
| -10.10% | 28.16% | |
| IDFC First Bank | 46.2 | 32 |
| 0.54% | 45.16% |
(Source: Moneycontrol)
And, how banking funds have performed recently?
Here are the returns of some of the key banks (as on September 12, 2022):
So, should one invest?
The banking system is witnessing a healthy recovery in loan growth led by a revival in the corporate segment, while growth in the retail and SME segments remains robust.
According to Poddar, systemic loan growth has hit 9-year high of 16.2 percent YoY for the fortnight ended September 9, 2022. The last time systemic loan reported ~16.2 percent YoY growth was in November 2013. In FY23 till date, loans grew 5.5 percent.
Though the macro environment is challenging and needs to be monitored, Poddar said she is expecting systemic credit to grow ~12.5 percent/13.8 percent YoY in FY23/FY24. Banks with higher CASA and floating rate loans are likely to be better placed in a rising rate environment.
Hence, she thinks that investors can look at adding banking to their portfolio ahead of this new growth cycle.
However, they should be careful about buying only those banking stocks that have a track record of good asset quality across interest rate cycles, said Tanushree Banerjee, Co-Head of Research at Equitymaster.
This is because both credit demand and NPA provisions would depend on the level of interest rates.
Recently, banks have been raising rates in the wake of Reserve Bank of India's repo rate hike. After a small jump in May by 40 basis points, RBI hiked the interest rate by another 50 basis in August. According to a Reuters poll, there is a wide consensus that the RBI will raise rates at the September 30 meeting too.
First Published: Sept 29, 2022 10:12 AM IST
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