For the last two years, mutual funds of banking and financial sector were in slow. Their performance in 2023 and 2024 was weaker than the rest of the equity funds. But now the picture is changing. The valuation of the banking sector has become so cheap that if credit growth rises, they can give great returns to investors.
Why the banking sector backward last year?
There were many reasons for the weak performance of banking sector funds. First, the banks were strict about the loan-to-depocit ratio (LDR), which reduced their lending margin. In addition, increasing concerns about unsecured loans (unless loans) made investors alert. There was also uncertainty about credit growth, which weakened the trust of investors in the banking sector.
According to Roshan Chatki, senior fund manager of ICICI Prudential Banking and Financial Services Fund, the enthusiasm of investing in the banking sector got cold. Amey Saath, fund manager of Tata Asset Management, says the banking sector’s earnings growth was 13–14%, while many other sectors were growing at a rate of 20-25%. In such a situation, investors thought it better to invest money elsewhere.
Foreign investors also sold fiercely in the banking sector. About 40% of FIIs took place in selling financial sector, causing it to come under sector and pressure. The insurance sector was also sluggish due to regulatory changes.
Why is there expected growth now?
Fund managers now hope to speed up credit growth. The demand for corporate loans may increase in the coming 12-18 months as companies are preparing to increase their investment. Credit growth in the last three-four years was mainly on retail loans (retail debt), but now corporate loan growth will also contribute to it.
Gaurav Kochhar, the fund manager of Mirae Asset Investment Managers (India), believes that Capax was slow due to elections in the first half of FY25, but in the second half and FY26, it could have boom.
Big banks benefit the most
The situation of big banks seems strong. Banks whose liability franchise (fund raising ability) is good can easily raise funds at affordable rates and give loans to big borrowers at affordable rates. With this, they can deal with the problems of asset quality in the system. ICICI Prudential’s Chatki says that large banks can raise funds at a low cost, allowing them to give loans to high-quality customers at a good rate and proceed.
Will the banking sector benefit from interest rate cuts?
Experts believe that RBI may cut interest rates twice in FY26. This will make it cheaper to take loans, which will promote credit growth and increase the profit of the banking sector. According to Gaurav Kochhar of Mirae Asset Investment Managers, reduction in interest rates will benefit both consumer demand and industrial investment, which will provide growth support to the banking sector.
Never seen such a cheap valuation!
Ameya Sathe, fund manager of Tata Asset Management, says, the banking sector is currently in a very attractive position in terms of valuation. The discount of the Nifty Bank Index is on its lifetime high against the Nifty 50. Many big banks are trading at a rate which were not seen even during the time of Kovid or Global Financial Crisis.
According to Hemang Kapasi, director of Santum Wealth, the price-to-book value of the banking sector before Kovid was 2.3–2.5 times, but now it has come to 1.7–1.8 times. That is, such an opportunity to invest in the banking sector has been seen very rarely.
There are risks, do not ignore them
The performance of the banking sector will depend on how much credit demand increases. If GDP growth, which is currently around 6.5–7%, fell to 3.5–4%, the banking sector may suffer a major setback.
Also, if the crisis of NPA (non-performing asset) spreads from unusual loans to secured loans (such as housing and auto loans), further pressure on the sector may come.
Should you invest now?
Capsi of SanCTum Wealth says that the right time to invest in sector funds is the same when the sector declines, so that the recovery in the next 1.5-2 years can be taken full advantage of. Currently the valuation of the banking sector is below the average average, and as the growth outlook will improve, there is a possibility of re-painting.
Abhishek Kumar, a SEBI registered investment advisor and founder of Sahajmani.com, says that investors should take care that the risk in sector funds is high. Investors should be prepared for this ups and downs. It would be better to limit the share part of the investment-do not apply more than 10-15% of the equity portfolio. Also, keep at least 3-5 years of view, so that the impact of the market fluctuations is reduced and there is a possibility of better returns.