The Hindu Business Line : Reliance Banking: Invest

INVESTMENTS can be considered in Reliance Banking. The valuation of a number of public sector bank stocks and old private sector bank stocks appear attractive.

Besides, a number of non-banking financial service companies are also poised to grow at a rapid rate. Investments in Reliance Banking will provide exposure to this universe of stocks.

This recommendation reverses our August 2005 call to pare exposures. At that time, the valuation of a number of banking sector stocks looked rich, on a relative basis. BSE Bankex gained 12.9 per cent since August 2005, while Sensex has gained 26.8 per cent. Bank BEES, an exchange-traded banking sector fund, gained 7.7 per cent while Reliance Banking only 0.2 per cent.

Since August 2005, volume and profit growth in the banking sector has been impressive. At the same time, barring large-cap stocks, the prices of a number of public sector and private sector bank stocks have either declined or stagnated.

The valuation of the banking universe is now attractive on a relative basis. Given the background of expected growth in business volumes and strong inflows into the stock market, the stage seems set for a rally in bank stocks.

Liberalisation in the banking sector is also on in right earnest.

The RBI has recently allowed banks to raise capital through long-term instruments that would reduce the cost of capital and enhance profitability.

Consolidation of banking companies in the public sector space is also likely to begin, sooner rather than later, in spite of stiff political opposition to such moves.

Valuation of most public sector and old private sector bank stocks at price-to-book ratios of less than 2 is also not demanding.

Portfolio: Relative to the market capitalisation of the banking sector, the assets under management of Reliance Banking Fund is small, at less than Rs 150 crore.

The fund is not fully invested, with a cash position of about 35 per cent. Over the past few months, the fund has generally maintained a large cash position.

This is a risk factor, considering that any rally in the banking sector could pull down returns if the cash position stays as high as this.

However, this situation is unlikely to continue. At the end of December 2005, the fund had 16 stocks in its portfolio. Four stocks — SBI, ICICI Bank, Punjab National Bank and IDBI — accounted for half the equity holdings. Stocks such as JM Financial and IL&FS Investsmart were also part of the portfolio.

The fund also held positions in old private sector banks such as ING Vysya Bank, Karur Vysya Bank, South India Bank and Federal Bank.

Attractively valued public sector banks, such as Bank of Baroda, Corporation Bank, Union Bank of India and Allahabad Bank also figured in the portfolio.

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