In recent months, mutual fund (MF) managers have reduced allocations to public sector banks (PSBs) on the expectation that share prices may move at their pace. Fund managers said the decision to reduce exposure to public savings banks was also due to the availability of better opportunities in the private banking space.
In March, MF sold PSB shares worth Rs 2,500 crore and invested Rs 4,900 crore in private bank stocks. MF has been a net seller of PSB shares in the last three quarters.
Ame Sathe, Fund Manager, Tata Mutual Fund, said, “In the banking and financial services fund, we now have only one PSB compared to three in the previous year. This is because we expect profit growth to decelerate in FY25
PSB shares have risen over the past few years on strong profit growth and improving asset quality. Interest has also been driven by attractive valuations for some public service banks. The Nifty PSU Bank Index has gained 84% in the past year, while the Nifty Private Bank Index has gained only 12.6%. Over a three-year time horizon, performance differences are even more pronounced. The Nifty PSU Bank Index gained 3.6 times, while the Nifty Private Bank Index gained 42%.
Fund managers say that since PSB valuations have increased significantly in the last 2-3 years, valuations of larger PSBs are now in the fair zone and most PSBs are overvalued. At the same time, valuations have improved from historical levels as a result of the underperformance of most private banks.
“Public bonds are attractive from a post-Covid valuation perspective, with most re-ratings now completed, further re-ratings will be required to improve financial performance at the same time, private bank stocks are trading at valuations close to long-term averages and in the medium to long term is expected to perform better,” said Gaurav Kochhar, fund manager at Mira Asset Investment Manager.
This change in allocation has led to a significant change in the proportion of MF holdings in bank stocks in the last quarter While the MF shareholding of the largest private sector bank, HDFC Bank, rose from 15.1% to 20%, the shareholding of the largest PSB, State Bank of India, fell from 12.9% to 11.5%, Capitaline data showed.
The overall weighting of the banking sector in market capitalization-based schemes has declined due to weak performance of private sector banks and reduced exposure of public savings banks. As of the end of March, banks’ weighting in these schemes (among the top ten fund houses) was 15.9%, compared to 19.4% at the start of 2024. The automotive and pharmaceuticals sectors are overweighted. M-type fund schemes include large-cap funds, mid-cap funds, small-cap funds, multi-cap funds and large-cap and mid-cap funds.
Tags: Fund managers higher valuations private banks reducing exposure public savings banks
