LIC underinvested in banking stocks

Banks account for only 18% of insurer's portfolio versus 23.3% weight in the Nifty

Life Insurance Corporation of India (LIC) is underinvested in banking stocks compared to the overall market. These accounted for around 18 per cent of LIC’s equity portfolio at the end of March quarter. In comparison, banks stocks are the biggest component of the benchmark Nifty, with 23.3 per cent index weight at the end of the fourth quarter, (see table).

LIC’s exposure in lenders is far below the sectoral limit of 25 per cent set for the banking sector by the insurance regulator.

This underweight position gains significance following concerns raised by Reserve Bank of India (RBI) Deputy Governor S S Mundra in an interview to Business Standard last week.

“As a banking regulator, we should be worried for a variety of reasons…There is a contagion risk or interconnected risk. Suppose the banking sector is not doing well and is in trouble, the equity holding of LIC will see value erosion,” he had said when asked about LIC’s investment in these stocks.

In all, LIC owns equity stake of one per cent or more in 33 public and private sector banks, cumulatively valued at around Rs 70,000 crore at the end of the quarter. In effect, LIC owns around 6.55 per cent of the Indian banking sector, given banks’ combined market value of Rs 10.7 lakh crore at the end of the fourth quarter.

To put things in perspective, LIC had one per cent or more stake in 387 companies valued at Rs 3.9 lakh crore at the end of the last quarter. Banks have the highest weightage in the LIC portfolio, followed by oil & gas (15.8 per cent) and fast-moving consumer goods  (12.1 per cent).

While Mundra has essentially raised concerns over LIC’s high stakes in individual banks, market experts say exposure to banking stocks is inevitable given, their capital market dominance.

“There is no escape from banking sector exposure. Banks account for the largest floating stock (non-promoters share available for trading) among all sectors. And, most large institutional investors have big exposure to banks,” said a senior official with a domestic broking house, requesting anonymity, as LIC routes its investment through it.

However, the amount of LIC’s stake in certain banks, mainly among public sector undertakings (PSUs), could raise many eyebrows. The insurance behemoth, which deploys investment from its policyholders into the equity market, owns 10 per cent or more in 13 government banks. In percentage terms, it has the highest stake in Corporation Bank (22.54 per cent), followed by Bank of India (14.93 per cent) and UCO Bank (14.36 per cent).

In contrast, it seems to be under-invested in fast growing private sector banks, with ICICI  being its biggest investment in the space with 8.11 per cent stake, followed by YES Bank (7.32 per cent).

Mid-sized banks account for a small part of LIC’s overall banking portfolio, given their low valuations. The top three PSU banks in its porfolio (in terms of stake) accounted for 5.6 per cent of banking portfolio.

 

“Banking is a well regulated sector, so, from a governance perspective the risk of investing in the banking sector is less. As far as the economic risks are concerned, bank stocks, like any other sector, are vulnerable to the economic slowdown,” said Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance.

By Insurance Regulatory and Development Authority of India (Irdai) norms, an insurance company can have maximum exposure of 15 per cent in a single sector. However, exposure to banking stocks can be up to 25 per cent.

LIC’s exposure to banking stocks has hovered between 17 per cent and 21 per cent in the past three years. At the end of the December 2014 quarter, banking stocks accounted for 20.7 per cent of its portfolio.

One of LIC’s biggest overweights (nine per cent against their Nifty weightage of only 3.9 per cent) is the metals and mining sector. “LIC is known to be a contrarian investor. The metal pack has not done well in the past 18 months. That’s the reason why it must be buying shares in the sector. On the contrary, banks and information technology stocks have done really well and LIC might have booked profits in these companies,” said Sandip Sabharwal, Mumbai-based fund manager.