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Be smart with banking funds August 14, 2012
Banking makes for a good investment if you go with the right stocks. And this is being reflected in the different investment strategies of the various banking funds
Author : Larissa Fernand


 Be smart with banking funds

Be smart with banking funds

For an understanding of the bifurcated nature of the funds in the “Equity: Banking” category, take a look at the 1-year returns generated by Kotak PSU Bank ETF and ICICI Prudential Banking and Financial Services.

With ICICI Prudential Banking and Financial Services (7%), Banking looks like a good sector to bet on. With the other (-20%), it appears appalling. But a closer look at the funds in this category throws up some clarity: The winners are the ones casting their lot with private banks.

Public sector banks are suffering from an NPA overdose and investors would do well to keep their distance. When State Bank of India (SBI) recently announced its quarterly results, its non-performing assets (NPAs) were 2.22% of total loans for the latest quarter, up from 1.6% a year ago. And there is no denying the fact that this is only expected to go up over the next few quarters. In fact, according to a report in the Economic Times on August 7, 2012, Reliance Communications approached SBI to restructure its short-term borrowing worth Rs 3,000 crore into long-term debt with a tenor of 3-5 years. It is not just small and medium enterprises facing the heat, even the big players are getting their debt restructured.

SBI is not a stand-alone example; all public sector banks are sailing in the same boat. And while alarm bells may not be ringing right away, it has certainly made investors uncomfortable.

Then there are the new corporate debt recast (CDR) norms issued by the Reserve Bank of India (RBI) that are projected to have a negative impact on the profitability of state-run banks. According to a report by Standard Chartered Securities, if the new CDR guidelines are followed, net profit of state-run banks will most likely decline to the tune of 6-18%.  The impact on private sector banks will be in the 0.2-2% range.

Does that mean Banking should be avoided from an investor’s point of view? No. It means certain banks should be.

Franklin India Bluechip, has a 24% exposure to Banking with almost the entire exposure to private banks. Portfolio manager Anand Radhakrishnan explains: “At this juncture, systemic risks on restructured loans/NPA are largely concentrated in capital-intensive sectors of the economy. At the retail level, we are not seeing the kind of stress that is being witnessed within these segments at the corporate level. Private sector banks’ relatively higher exposure to the retail space therefore has them well-placed vis-à-vis public sector banks. In some private banks, there may be stress on the asset quality front but it is not structural in nature.”

A number of the NPAs faced by PSU banks are structural in nature. An unviable project cannot become viable if it is structurally in bad shape. But an NPA caused because of the cyclical nature of an industry (such as automobile lending) will not be taboo. And that is the predominant difference between NPAs of the public and private sector banks.

 


Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website. Risk Factors: Mutual funds, like securities investments, are subject to market risks and there is no guarantee against loss in the Scheme or that the Scheme’s objectives will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on various factors and forces affecting capital markets. Past performance of the Sponsor/the AMC/the Mutual Fund does not indicate the future performance of the Scheme. The name of the Scheme does not in any manner indicate the quality of the Scheme, its future prospects or returns. Please read the Statement of Additional Information and Scheme Information Document carefully before investing.



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