Banking funds shine amid Budget boost, deliver 35% returns in three months

Top performers within domain include Tata Banking & Financial Services (15.6%), SBI Banking and Financial Services Fund (16.3%) and Sundaram Fin Services Opp (15.5%)

The rally in banking stocks has boosted banking funds, which had been laggards for much of last year.

The category has given returns in excess of 35 per cent in the past three months, higher than other sectoral and thematic funds. In comparison, pharma and IT funds returned 10.4 per cent and 19.6 per cent, respectively, data from Value Research shows. Consumption oriented funds gave 22 per cent during the period.

One-year returns (10.7 per cent) for banking funds, however, still lag peers.

Top performers within the category include Tata Banking & Financial Services (15.6 per cent) and SBI Banking and Financial Services Fund (16.3 per cent) followed by Sundaram Fin Services Opp (15.5 per cent).

Banking funds invest not only in banks but the entire gamut of financial services entities -- in wealth management, housing finance, rating agencies, broking, non-banking financial companies (NBFCs) and micro finance institutions.

The BFSI sector has underperformed the broader market in 2020 by a significant margin owing to issues of moratorium and the stress in the system. However, both Q2FY21 and Q3FY21 operating and financial performance across the banking sector was better-than-expected.

The Nifty Bank index hits its all-time high after Finance Minister Nirmala Sitharaman announced the privatization of two public sector banks and measures to clean up the NPAs in the banking sector.

Axis Securities recently upgraded BFSI to overweight, after taking the Budget and operating performance into consideration.

"Focus of banks has shifted to growth and as the macroeconomic cycle improves, banks being leveraged play will see stronger earnings growth," it said in a note.

Foreign portfolio investors (FPIs) have pumped in $7.5 billion in the quarter ended December before withdrawing $345 million in January. The FPIs' weightage in the banking sector stood at 33.8 per cent in January versus 34.9 per cent in December.

"We should not be surprised if FPIs will again park majority of their flows in Banking and Financials this month...FPIs might look to add meaningful positions in PSU heavyweights along with their favourite private banks," said a report by Edelweiss.

The business momentum has improved across business segments for banks. Growth in deposits remains strong, with the CASA mix showing a positive bias. Asset quality has been much better than earlier expected, led by improved collection efficiency, controlled slippages and low restructuring, said a report by Motilal Oswal Financial Services.

"Large banks are better placed with high proforma provision coverage and lower restructuring, while mid-sized banks appear to be marginally more stressed and expect higher provisions in the near term. Overall, we expect strong earnings rebound in large banks, led by moderation in credit cost and improved operating performances," the note observed.