Banking funds excel once again

Since the turnaround in the bellwether indices in February this year, sectors such as banks and finance, auto, energy and consumption have been performing excellently. While the Nifty 50 index has clocked 27 per cent returns since the February 2016 lows, the Bank Nifty index has outperformed it by delivering 44.6 per cent returns.

Many private sector banking stocks have once again registered new highs, helping banking sector funds score outstanding returns over the past one year.

The BSE Bankex and Bank Nifty Indices have delivered 10.7 per cent and 10.5 per cent, respectively, in the last one year, outperforming the Sensex and Nifty returns of 7.7 per cent and 5.4 per cent. In the short term (six months), the Banking index has delivered 24.5 per cent while the returns of the bellwether indices stand at 14 per cent.

Of the 12 banking sector funds, only eight have a track record of more than three years. Among these, ICICI Pru Banking & Financial Services and Reliance Banking are the outperfomers over a three-year period. The funds have given 34 per cent and 30 per cent returns, respectively, outshining their benchmark index return of 24 per cent.

Among the new funds, Birla Sun Life Banking & Financial Services and SBI Banking & Financial Services have delivered good returns over the last six month and one-year periods. Here, we look at the performance of all banking funds over the past six-month and one-year time frame.

All the top four funds, namely ICICI Pru Banking & Financial Services, Birla Sun Life Banking & Financial Services, UTI-Banking Sector and SBI Banking & Financial Services have exposure in the mid-cap segment to the extent of 20-38 per cent of their portfolio. This could have boosted their returns. For example, stocks such as Repco Home Finance and Capital First have witnessed a superb rally in the mid-cap segment over the last one year. A second common factor among these toppers is the higher exposure to private banks.

HDFC Bank is the most preferred stock for these funds. This stock gained 17.8 per cent in the last one year and is up 37.8 per cent since the February 2016 market lows. Thirdly, the preference towards financial service related stocks shown by these funds has also helped. Stocks such as Bajaj Finance and Cholamandalam Investment and Finance have posted good returns and also recorded new highs.

Finally the rebound in PSU bank stocks has also helped the funds’ performance.

The marginal under-performance in the Sahara Banking & Financial Services and Taurus Banking & Financial Services could be due to more exposure towards large-caps which didn’t have as spectacular a run as mid-caps and also due to their concentrated portfolio.

With interest rates on a downward trajectory, banks can be expected to have better loan growth; higher demand and better prospects for businesses could also imply lower chances of defaults on the part of borrowers. These factors could make investments in banking stocks attractive over the long term.