Illustration: Binay Sinha
Mutual funds (MFs) pruned exposure to banks and non-banking financial companies (NBFCs) during January-March 2024, amid persistent margin pressure and regulatory issues.
The underperformance of banks in the fourth quarter vis-a-vis other sectors also led to a decline in their weight in MF portfolios.
The Nifty Bank index declined 2.4 per cent in the January-March 2024 period even as the Nifty 50 index went up 2.7 per cent.
The average exposure of active MF schemes (belonging to the top 10 fund houses) to banking sector stocks stood at 15.9 per cent at the end of March. This is significantly lower than the 19.4 per cent exposure at the beginning of calendar year 2024, shows data from Nuvama Alternative & Quantitative Research.
The NBFC exposure dipped to 9 per cent from 9.9 per cent during the same period.
Fund managers said the decision to cut exposure to banks and NBFCs was on account of sectoral headwinds and availability of better opportunities in other market segments.
“We have slightly reduced our exposure to banks owing to the continued struggle on the deposit growth side. The decision to reduce NBFC exposure was largely due to regulatory aspects like the increase in risk weights and concerns over unsecured loans,” said Mahesh Patil, chief investment officer (CIO), Aditya Birla Sun Life (ABSL) AMC.
ABSL MF’s market-cap schemes’ exposure to banks stood at 19.3 per cent at the end of March 2024, down from 24.7 per cent at the start of the year. The report is based on portfolios of market-cap schemes, which include largecaps, midcaps, smallcaps and multicaps.
However, some see banking stocks to do well, going forward, as the margin pain is expected to subside.
“The Q4 results of banks will likely show moderate pressure on the net interest margin (NIM). While this may spill over to Q1 FY25 for some banks, the situation is set to improve for most of them. For NBFCs as well, margin pressure should bottom out by Q1 with moderate improvement in the second half of FY25,” said Amey Sathe, fund manager, Tata Mutual Fund. He added that several banks are attractive from the valuations and growth projection perspectives.
In their Q4 earnings preview, brokerages have shared a mixed view on the banking sector. While they expect a healthy credit growth, the margin compression is expected to continue.
Prabhudas Lilladhar sees a further decline in margins, citing a rise in deposit cost.
“Due to the lag effect, rise in deposit cost is expected to outpace loan yields that may marginally increase,” it said.
Elara Capital, IIFL Securities and Motilal Oswal Financial Services also see compression in NIMs for select banks.
While reducing the banking and NBFC weight in portfolios, MFs raised their exposure to automobiles, capital goods, pharmaceuticals and healthcare and power sectors.
The automobile sector weight rose from 7.5 per cent to 9 per cent amid strong volume growth in the two-wheeler and passenger vehicles’ segments.
“We have increased weight in the automobile space as we are seeing fairly good demand, especially after the festival season.
Most companies have surprised on the margin front due to premiumisation and lower discounts. However, this is limited to the two-wheeler and passenger vehicles’ segments as the commercial vehicle segment is yet to show improvement,” he said.
Automobile stocks delivered a strong show in Q4 with the Nifty Auto index surging 15 per cent.
First Published: Apr 19 2024 | 8:38 PM IST
