Mutual funds withdraw from PSB stocks on asset quality woes

Amidst rising worry about the asset quality of banks, which is set to worsen once the RBI’s moratorium comes to an end, mutual funds are gradually reducing their stakes in bank equities.

According to SEBI data, mutual funds’ (MFs) exposure to banking sector equities witnessed a sharp ₹67,673-crore decline year-on-year to ₹2,09,146 crore as of June 2020. The exposure to the sector for the same period last year stood at ₹2,76,819 crore.

In percentage terms, MF exposure to bank equities dropped to 19.44 per cent of total equity assets under management (AUM) in June 2020 as against 24.78 per cent of the total AUM during the same period last year.

“The concerns over asset quality of banks have risen sharply ever since the Covid-19 pandemic led to the nationwide lockdown,” said Ajit Mishra, VP-Research of Religare Broking, adding, “Despite the considerable easing of lockdown recently, there are certain parts of the economy that have still not seen the light of day, and therefore the concerns over asset quality remain in banking stocks, leading to a drop in exposure to banks by MFs.”

Noting that the weightage of the banking sector in the headline indices like Sensex and Nifty had risen to nearly 40 per cent over the last few years, Sachin Shah, Fund Manager at Emkay Investment Managers, said, “Such a heavy sector indexweight forced many mutual funds to have similar allocations in their portfolio. Clearly, this made the sector overbought and therefore, any headwinds that would affect the sector would have a significant impact on banking stock prices and overall NAVs.”

However, shareholding patterns of some of the leading banks show that while MFs have been cutting down their exposure to public sector banks (PSBs) over the last few quarters, their exposure to private sector banks has increased.

For instance, MF shareholding in HDFC Bank increased to 14.04 per cent in June 2020 from 13.76 per cent in the previous year. Similarly, MF holdings in Axis Bank increased to 19.61 per cent (15.81 per cent) during this period. However, MF holdings in State Bank of India fell marginally to 13.18 per cent (13.50 per cent) and holdings in Bank of Baroda dropped to 8.79 per cent (11.12 per cent) during the same period.

Similarly, holdings in Canara Bank dropped to 3.25 per cent (8 per cent), Indian Bank also witnessed a steep decline to 4.70 per cent (8.45 per cent) between June 2019 and March 2020, up to which data is available.

“The private sector banks are better placed due to better asset quality and stringent lending norms,” Religare’s Mishra said, adding, “The PSU banks face a double whammy; on one hand, they would be inclined towards lending more, while on the other, the asset quality concerns are higher as compared to private banks.”

Pharma, telecom and petroleum gain

Amidst increasing healthcare spending and a shift towards a remote working model due to Covid-19, MF allocation to Pharmaceuticals and Telecom service sectors witnessed an year-on-year increase of ₹24,204 crore and ₹23,036 crore, respectively.

As of June 2020, MF exposure to Pharmaceuticals stood at ₹78,280 crore (₹54,075 crore) and Telecom service at ₹40,065 crore (₹17,030 crore).

“Telecom is one business which probably has got a boost in the current environment. The need for digital connectivity has got even more pronounced in the post-Covid-19 environment,” Emkay Investment’s Shah said.

The ‘Petroleum product’ sector is the other major gainer which witnessed an allocation of ₹79,573 crore (₹58,168 crore) as of June 2020. For instance, MF holdings in Indian Oil increased to 6.51 per cent (5.78 per cent) while holdings in Reliance Industries grew to 5.25 per cent (4.56 per cent) on Y-o-Y basis as of June 2020.

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