Top fund manager adds banks after stress tests

Indian banks, which posted their biggest rally in four years on Thursday, will defy predictions of worsening bad loans with the economy poised for a rebound, according to the country's biggest money manager.

HDFC Asset Management Co's Mid-Cap Opportunities Fund is raising stakes in non-state lenders after the fund's stress tests showed they were "attractive," said Chirag Setalvad, who manages the portfolio. A Bloomberg gauge of 11 banks surged 9.9 per cent on Thursday after new Reserve Bank of India Governor Raghuram Rajan flagged measures to free up the industry. The index has declined 48 per cent from a May high as the monetary authority raised interest rates to stem the rupee's unprecedented drop.

Setalvad forecasts banks' profitability, already at the lowest since 2009, will recover in two years as Rajan unwinds measures to support the currency that increased costs for banks, and as Asia's third-largest economy recovers. Overseas and local investors have been selling lenders since June as bad loans rose to the highest level in five years.

"The banking sector has got issues and when that happens it presents an opportunity," Setalvad, whose company manages $15.9 billion of assets, said in an interview, without identifying companies. "Even the ugly is getting priced in adequately. The general expectation is that the economy will recover therefore asset quality will improve."

YES Bank Ltd on Thursday surged 22 per cent to Rs 287.50, paring this year's loss to 38 per cent. HDFC Bank, the country's biggest lender by market value, rallied the most since May 2009. The BI Indian Banks index's 50 per cent decline this year made it the worst performing among 222 Asian indexes tracked by Bloomberg.