Foreign portfolio investors' interest gives private lenders a boost

The Nifty Private Bank index has rallied 150% in the past five years compared to 78% returns given by the Nifty amid a steady increase in FPI ownership

Shares of private banks have decisively outperformed the broader markets in the past five years as foreign portfolio investors (FPIs), who are known to be price-setters in the Indian markets, have deployed the bulk of their resources in this sector.

Since 2013, the Nifty Private Bank index, which is a gauge of private bank stocks, has rallied 150 per cent against 78 per cent returns given by benchmark Nifty, data showed. 

Experts say strong growth prospects along with comparatively low toxic assets are increasingly driving FPIs towards Indian private bank stocks. 

All the top private banks today have significant FPI shareholding with cases such as HDFC Bank and ICICI Bank, where overseas funds hold the majority of the stake. FPIs have assets under custody (AuC) worth $104.5 billion deployed in the Indian banking and financial services sector — the highest allotment for any individual sector. In other words, about a fourth of FPI money in India is deployed in banking and financial services stocks.

Experts say overseas investors have been bullish on the Indian banking sector for a long time on account of strong potential. The Indian economy has grown at a healthy pace in the past 15 years, providing a great opportunity for the Indian financial sector. 

“As the Indian economy embarks on a high-growth trajectory, banks would be the biggest beneficiaries. There would be a significant need for capital, both from the commercial and retail side, providing great business opportunities for Indian banks. This is the reason why foreign investors are so bullish about Indian banks. However, Indian banks can unleash their true potential only after the issue of toxic assets is resolved,” said Andrew Holland, chief executive officer, Avendus Capital Alternate Strategies.

However, the investment theme among the banking stocks has seen some shift in the past five years. Analysts say in the recent past FPIs have been aggressively chasing banking and non-banking financial company (NBFC) stocks that have a strong retail focus, compared to large corporate lenders.

The retail lenders would benefit a lot from strong domestic consumption and the downside is also protected as toxic assets in retail lending are also lower. For instance, consider HDFC Bank in which FPI shareholding has gone up to 52 per cent in September 2017 from 40.6 per cent in December 2012. Similarly, in case of ICICI Bank the FPI ownership is currently 59.4 per cent against 51 per cent at the beginning of 2013.

“Within the banking space, retail-focused lenders have emerged as a bright spot. While commercial-focused lenders, especially state-owned banks, are suffering with low credit growth and high share of non-performing assets (NPAs), retail lenders are showing promise. With the purchasing power of Indian households going up, retail banks will continue to clock good growth numbers,” said G Chokkalingam, founder, Equinomics Research and Advisory.

As FPI have increased their holdings in the financial space, they have reduced it in the information technology (IT) and oil & gas space. FPIs currently hold AuC worth $34.6 billion in Indian IT sector, while the value is $32.5 billion for the oil & gas sector.