Tuesday, May 31, 2011

Banking MFs fall on lending fears

With heightened concerns that a sharp rise in interest rates and high inflation would dampen growth prospects and in turn, lead to leading to a drop in lending, mutual funds (MFs) that invest in banking stocks have taken a hit in the short-term .

MFs that focus on the banking space sector, one of the consistently best performers in the recent past, have come up with a poor show landing at the bottom of the performance chart in the one- and six-month time frames. They are one of the worst performers in the three-month period as well.

Banking MFs have lost 12.8% in the past one month (till May 24), recording a much steeper decline than even the small-cap index, which has been adversely affected in the recent market downturn. While the broader markets have dropped 14%-15 % from the high October 2010 levels hit in October last year, the banking index lost about 23%.

The tight monetary policy adopted by the RBI has emerged as a key risk for the banking sector as it could slow down industrial activity and impact loan growths in the current fiscal, analysts said. "Short-term rates went up in January-March due to the liquidity squeeze and as a result, cost of funds also increased," said Mahesh Patil, head, domestic equities, Birla Sun Life MF . "The aggressive (RBI) rate hikes, forecasts of a lower economic growth and concerns over the quality of assets (in banks' books) also played a role," he said.

The cost of deposits has started to increase with a lag for banks after the recent rate hikes by the RBI. Every 50 basis points (bps) or 0.5% increase in savings bank (SB) rates negatively impacts profit margins by 8 bps.

The interest expense growth was higher than deposit growth for the country's top lender State Bank of India(SBI) after six quarters in January-March 2011, analysts at Motilal Oswal said. While interest expenses grew 22% in the quarter, deposits increased 16%. The annual slippage or gross non-performing assets remain high for many leading banks including SBI , observers said. Stocks of most leading banks have fallen at a faster pace than the Sensex in the last six months.

Incidentally, some banking scrips, especially in the public sector space, have lost more than even the BSE Bankex. Observers said public-sector banks get impacted as they have a higher exposure to SB accounts compared to larger private banks. Though banking-focussed funds would underperform in the current quarter, they would do well in the medium and long-term , Birla's Patil said. Despite the poor show in the short run, banking sector MFs are among the top-5 best performers in the equity MF category in one, two and three-year time frames.

They remained in the top slot generating 22.7% returns , 7% more than the next best performer, for the fiveyear period.


Thanks & Regards,
Monindro Saha
Summer Interns @ DENIP CONSULTANTS PVT LTD.

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