Mutual funds raise holdings in state-run banks despite NPA fears

These funds have increased investments in public sector banks (PSBs) over the past seven months, despite fears of bad loans amid the turbulence caused by the covid-19 pandemic, showed an analysis of India’s top 20 domestic mutual funds.

In May, the weightage of these banks among mutual funds reached a 15-month high of 3.4%, a jump of 30 basis points (bps) from the previous month and 120 bps from a year earlier, according to data sourced from the Association of Mutual Funds in India (Amfi) and mutual fund database NAV India, and analysed by Motilal Oswal Financial Services Ltd. One basis point is one-hundredth of a percentage point.

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The increased investments saw the sector, in the 13th position a year ago, climb to the ninth rank in the allocation of investments by mutual funds.

In May, the Nifty PSU Bank index jumped 18% after falling for two consecutive months. The Nifty Private Bank index also rose 6.33% in May, while the Nifty Bank index rose 8.37% outpacing the benchmark Nifty, which gained 6.50% during the month.

The March quarter earnings of banks suggested that concerns over asset quality are less worrisome and the impact of the second covid wave is likely to be manageable, according to analysts.

“So far, the impact of covid has not been as bad as forecast by various agencies after the first lockdown. If anything, we are probably looking at a reduction in headline gross and net non-performing loans (NPLs) for the banking system. The high moratorium ratio gave a less-than-convincing signal on the eventual slippage ratio in the first year of covid,” said Kotak Institutional Equities Research analysts in a note on 7 June.

Motilal Oswal Financial Services said the corporate cycle is also clearly turning. Thus, some PSBs are expected to also benefit from it. “PSU banks are trading at a price to book ratio of 1.1 times, near the historical average of 1 time. Some of the public sector banks reported a lower retail slippage trend versus few midcap private banks….We expect credit costs to normalize and business momentum to improve in both retail and corporate,” the brokerage firm said.

Private banks at 18% held the top rank among sectoral holdings for mutual funds in May, followed by technology (11%), healthcare (7.6%), and non-banking financial companies (7.4%).

Oil and gas, capital goods, and insurance sectors are seeing a monthly increase in weightage by mutual funds, while contact-intensive sectors such as auto, retail and real estate are also receiving more fund allocation.

Sectors such as healthcare, metals, consumer, technology, telecom, chemicals, consumer durables and cement, however, saw a month-on-month decline in their weightage.

Mutual funds are paring holdings in metal stocks with their weightage reducing by 20 bps to 3% in May, after hitting a 29-month high in April. Following a 22% rise in April, the NSE Metal index gained 6.47% in May.

At an aggregate level, net inflows into equity mutual fund schemes raced to a 14-month high of ₹9,235.48 crore in May, showed data issued by Amfi. Equity schemes saw a net inflow of ₹1,783.13 crore in April, against ₹5,045.53 crore in May last year. The contribution of monthly systematic investment plans rose a tad to ₹8,818.90 crore in May from ₹8,590.89 crore in April.