Banking sector funds have surprised investors in the last one month. The category has offered 21.38% returns in one month. It is indeed surprising because the banking sector has suffered a lot in the last one year. The category was down 28% in one year. Since nobody is counting on a dramatic pickup in economic activities in the near term, what has changed the fortunes of the banking sector?
“Banking and Financial Services saw a good rally in the last one month. It was mostly because of the global rally in assets. The negativity on the job loss side and SMEs were far lower than anticipated. As the economy opens despite the pandemic, the growth is expected to be better than the June quarter. Banking sector is the mirror of economic growth, ” says Rajat Jain, CIO, Principal Mutual Fund.
Will a better-than-anticipated economic impact and growth keep the bank stocks higher in the coming months? Though the banking system is awash with money, banks are not in a hurry to take risk and lend the money to companies. Companies are also not in a hurry to borrow as they do not see a dramatic change in demand from consumers.
“Pure banking and lending services are dependent on growth expectation in the next year. We are expecting asset quality to improve from September onward because the lockdown is being lifted gradually. The worst phase for growth was expected to be June quarter and it is almost behind us now. So the outlook for banking sector is positive,” says Sonam Udasi, Fund manager, Tata Banking and Financial Services Fund.
Udasi says he is expecting a U-shaped recovery. “The spends on credit and debit cards have come back and did not actually dip to the expected low levels. This is a positive for the sector. The non-lending businesses like insurance and AMCs are positive. The penetration of insurance has increased and is expected to increase in the coming time just like AMCs. This is another factor driving the performance of the banking schemes,” Sonam Udasi.
If growth picks up momentum gradually, it would surely be a huge positive for the banking and financial sector. However, concerns about the health of public sector banks still persist. Most of them have NPA issues and they are also perennially capital starved.
“Yes, many PSUs are stressed. But I believe it is not just the PSUs. There are good and bad banks on both sides. There are some good big private banks that are available on good valuations and so the incentive there is higher. But I really believe that it is just good stock picking,” says Rajat Jain.
Udasi says his scheme does not own any PSU stocks. “Private sector banks have good governance, strong underlying, they gave great transparency and they are available cheap at the moment,” says Sonam Udasi.
As you can see, there are still some ifs and buts when it comes to the long-term prospects of these schemes. As you know, it is too early to predict the nature of economic recovery and how the pandemic is going to subside, investors should proceed with extreme caution when it comes investing in stocks. Since banking and financial services are major force in the Indian economy, any uptick would be first visible in the sector. However, do not expect a dramatic turnaround overnight.
“Investors should be cautious. From a five-year view, banking sector is a good buy, but the market and the sector are going to remain volatile. It is good to invest via a diversified fund for retail investors,” says Rajat Jain.