The concentration risk notwithstanding, mutual funds still have room for increasing their exposure to banks
Mumbai: Nearly 17 per cent of the equity assets held by mutual funds consist of bank stocks. Banking was the only sector to which mutual funds have exposure in double digits. The second highest exposure was to software companies at 7.93 per cent, at the end of November 2010.
Of the total Rs 2, 03,702 of equity assets, Rs 34,225 crore are invested in shares of lenders, according to data available on the SEBI website. This level of exposure of mutual funds to banks raises concerns about concentration risk. (Concentration risk is the likelihood of loss arising from heavy exposure to a particular sector or company.) But the mutual funds are not worried.
“Mutual funds’ exposure to banks is less than the weight in the index. This underexposure would help the funds outperform their index. Also, there are a few banks within the sector which are positioned to do well,” said Navneet Munot, Chief Investment Officer, SBI Mutual Fund.
Munot’s argument is based on the fact that the weight of lenders in the BSE Sensex is 23.93 per cent.
A couple of funds are already having more than 20 per cent exposure to banking stocks. HDFC Top 200 (G) has 23.51 per cent exposure to banks, while UTI Equity Fund-G has 20.44 per cent of its assets in bank shares.
Large Exposure to Banks
|
Scheme Name |
Bank assets (Rs cr) as on 30 Nov |
Bank Holding % of asset |
ICICI Bank (as % of assets) |
SBI (as % of assets) |
|
HDFC Top 200(G) |
9424.8 |
23.51 |
5.58 |
8.42 |
|
UTI Equity Fund- G |
NA |
20.44 |
4.08 |
2.25 |
|
Franklin India Bluechip(G) |
3326.76 |
18.19 |
6 |
2.87 |
|
Birla SL Frontline Equity-A(G) |
NA |
17.98 |
3.93 |
3.06 |
|
DSPBR Top 100 Equity-Reg(G) |
2810.98 |
15.62 |
4.11 |
6.34 |
|
Reliance Growth-Ret(G) |
NA |
14.1 |
3.48 |
4.71 |
Source: Accord Fintech
Among the banking stocks, the country’s two largest banks State Bank of India (SBI) and ICICI Bank have attracted the highest investments. These two banks account for about 23 per cent of the total investments in banks.
Banking Sector Concerns
Over the last month, banking stocks have fallen sharply. The BSE BANKEX was down by 11.5 per cent. The net interest margins (NIMs) of banks will be under pressure as deposit rates rise, while increase in interest rates on loans lag.
There is external pressure too on banks to go slow in raising lending rates. The RBI Governor recently urged banks to settle for a lower NIM by raising deposit rates and keeping lending rates lower. A few banks like SBI, BOI, PNB and ICICI bank have already raised their deposit rates without hiking their lending rates.
The other factor that will put pressure on margins of banks is the tight liquidity conditions. According to industry estimates, nearly Rs 1, 30,000 crore worth of CDs (certificates of deposit) are due for redemption by the end of this month.
SBI MF’s Munot said, “Till the time liquidity remains tight, banks funding cost would go up while they lack the power to increase lending rates.” The increase in lending rates also poses the risk of increase in defaults. Additionally, there exists the risk of defaults in exposures to commercial real estate, microfinance lenders and the telecom sector because of the alleged scandal in 2G spectrum allocation.
Banking sector in the last one year has given higher returns (27 per cent) than BSE Sensex (15.2 per cent).
|
Banking on Returns | ||
|
Banking Sector Funds |
6 Months Return (%) |
1 Year Return (%) |
|
Reliance Banking(G) |
25.57 |
44.31 |
|
Religare Banking-Reg(G) |
21.03 |
37.03 |
|
UTI Banking Sector(G) |
21.32 |
35.5 |
|
Sahara Banking & Financial Services(G) |
18.49 |
35.23 |
|
Sundaram-Select Thematic Funds-Fin Serv Oppor(G) |
20.96 |
33.49 |
|
ICICI Pru Banking & Fin Serv-Ret(G) |
21.07 |
30.42 |
|
JM Fin Services Sector(G) |
14.2 |
19.33 |
|
Source: Accord Fintech ( Returns as on December 29, 2010) | ||
