The Hindu Business Line : Banking funds outperform Sensex

But the domestic funds which invested in this sector have reaped 54-per cent returns over the last one year. The Sensex has managed a 31-per cent gain in the same period.

Kotak PSU Exchange Traded Fund, PSU Bank BeEs, Reliance Banking and Sundaram BNP Paribas Financial Service Opportunities notched up returns of over 55 per cent, outperforming the broader market indices.

What made Indian bank stocks outperform even as the global credit crisis was assuming alarming proportions?

Market watchers point out that the fact that the Indian banking sector stayed away from toxic assets helped, thanks to the prudent regulations by the Reserve Bank of India (RBI).

The central bank’s efforts to ensure adequate liquidity by easing Cash Reserve Ratio and Statutory Liquidity Ratio requirements during the crisis aided bank operations.

Proposals to restructure corporate loans and recapitalisation packages for the public sector banks also helped the valuations for banking stocks.

Surprisingly, banking funds have outperformed all other categories of equity funds even over a five-year period.

Banking sector funds have delivered an annualised 31 per cent return over five years, well ahead of the Sensex return of 25 per cent.

The BSE Bankex has emerged one of the best performing indices despite witnessing a rising interest rate cycle and monetary tightening measures over the September 2004-August 2008 period.

Explaining why the banking sector funds have managed long-term returns, Mr. A Balasubramanian, CEO of Birla Sunlife AMC, explains: “Indian banks provide exposure to business opportunities that represent a good portion of the economy. The banking system has also become much stronger compared to global peers’ in the last one decade or so due to a tight regulatory environment combined with improvement in operating efficiencies. Indian banks have some of the finest balance sheets with low non-performing assets and strong capitalisation”.

Will bank stocks continue this outperformance with interest rates set to rise again?

Mr Balasubramanian believes they may. He says, “In a scenario of rising interest rates, banking system today is sufficiently equipped to manage the cost of the funds through a fair mix of low-cost deposits and better asset-liability management as well as to pass on the impact of rising interest rates to customers.”

Besides, bank investment books have also become less vulnerable to interest rate swings, with the investment-deposit ratio falling from an average of 47 per cent in 2004-05 to 33 per cent in 2008-09.

The increase in held-to-maturity portion of the portfolio may also reduce mark-to-market treasury losses.