Fund managers lap up corporate banks in April

Mumbai: Fund managers are increasing their bets on banks with a bulky corporate lending book that have been largely ignored by investors because of bad loan worries.

Equity schemes of top mutual funds lapped up shares of select private and public sector lenders in April as banks with strength in retail lending are considered expensive after their recent run up.

Among the sizeable purchases done by these asset managers, ICICI Prudential Mutual added IDFC Bank and ICICI Bank to its schemes. Reliance Mutual bought Bank of India, Birla Sun Life Mutual bought Andhra Bank and DSP Blackrock was a buyer in Bank of Baroda Punjab National Bank.

“Valuations of corporate banks are looking attractive compared to many other frontline retail banking stocks,” says Dhaval Kapadia, Director – Portfolio Specilist, Morningstar Investment Adviser India.

Several PSU banks trade at a Price to Book ratio far lower than their 10 year average. For example, Bank of Baroda and Punjab National Bank trade at a price to book value of 1.05 times and 0.59 times compared to their 10-year average of 1.16 and 1.19 respectively. In comparison, private banks are trading at a Price to Book ratio of 3-5 times.

Till now, investors shunned corporate banks as high bad loan levels have delayed their turnaround and a continued slowdown in the economy threatens to compound their problems.
High leverage among large corporate houses and limited capex from the private sector led to weak borrowing demand from companies.

In addition to cheaper valuations, fund managers believe lower interest rates over the last couple of years are likely to bode well for corporate borrowers as and when the capex cycle is likely to kick in.

“Cyclically we are quite close to the bottom of the cycle and things could start looking up in a few quarters for corporate banking business. These banks have suffered double whammy of low growth and high NPLs over the past few years and we believe that they are close to the end of this vicious cycle,” says Vinay Sharma, Fund Manager, ICICI Prudential Mutual Fund. He believes that Indian corporates have begun the journey of deleveraging and the process could accelerate in the next few quarters. As consumer and infrastructure demand picks up, capacity utilisisation of some industries is likely to inch up requiring fresh capacity building, therefore leading to higher growth for the banking system.

Market participants are optimistic about the government's efforts to clean up the bad loan mess

“The government along with the banking regulator has taken several proactive steps in resolving NPA issues which include passing the bankruptcy code and the latest amendments to the RBI act. This will increase the pace of resolution and many corporate bank balance sheets will be healhier,“ says Alok Ranjan, Head of Research, Way2Wealth.