Broadly, both ETFs tracking the Nifty Bank index and actively managed banking sector funds have not been able to make the most of the buzz around shares of the lenders so far this year. This is because both these products have limited exposure to the public sector and smaller banks, which have been the top performers this year. Actively managed funds are betting on a wider universe of firms dealing in financial activities including a mix of bank stocks, non-banking finance companies, insurers and wealth managers. Bulk of ETFs’ exposure to the sector is through private lenders, which dominate the bank index.
Actively managed funds’ underperformance does not make a case in their favour. They invest in banking, NBFCs, HFCs, insurance stocks providing a scope for diversification. While one segment here would do well, the other segments may languish,” says Deepak Jasani, head-retail research,
Securities. Jasani believes investors who just want to focus on the banking sector, can consider investing in banking ETFs like Nippon India ETF Nifty Bank BeES and Nifty Bank ETF.
The Nifty Bank has returned 18% in 2022 so far, while the average returns of bank funds have been 15.9% as against the 5% upmove in the Nifty. In comparison, the Nifty PSU Bank index has jumped 57%.
The Nifty Bank ETF primarily consists of private sector banks with an exposure of 14% to public sector banks. Most of the actively managed bank funds largely stuck to private lenders like
, HDFC Ltd, , and . While most of them had exposure to SBI and among PSU banks, their allocation to best-performing smaller state-owned banks was relatively small.
Fund managers are hoping that action will soon shift from PSU banks to the underperforming private lenders.
“A lot of catch-up in valuations of PSU banks has already happened, after the sharp rally this year,” said Vinay Sharma, fund manager at Nippon India Mutual Fund. “Hereon they will grow in line with earnings growth. Over the long term, private banks are expected to gain market share and grow faster than PSUs.” Sharma said though the valuations of private banks are close to their 10-year average, they are not expensive when compared to the Nifty.
US investment research firm Bernstein has initiated coverage on the Indian lenders with HDFC Bank as its top sector pick, followed by India’s largest lender SBI and Axis Bank.
“The top five Banks are witnessing strong credit growth at a time when asset quality is progressing in the right direction. There are reasons to believe that better prospects for lenders are still ahead and there are enough opportunities for investors and we are bullish on lenders,” said Sahil Kapoor, head (products) and market strategist at DSP Mutual Fund
Private banks may be in a better position to benefit from the demand for investment products.
“Private sector banks due to their efficiency will gain market share and increase fee income by cross selling wealth management, insurance and third-party products, all of which will lead to higher earnings,” says Suvajit Ray, head (products) at
.
