HDFC Mutual Fund has announced the launch of the HDFC Banking and Financial Services scheme. Anand Laddha, Fund Manager Equities & Senior Equity Analyst, HDFC Asset Management Company, will be in-charge of this scheme. Is this a good time to be looking at a sector where the danger of non-performing assets (NPA) still lurks around? He shares his views on the new fund offer with Moneycontrol.
Why invest in banking and financial sector now when there is a fear of NPAs due to the second wave of COVID-19?
Over the last two decades, the banking and financial services sector has grown faster than the GDP. Despite this growth in the past, the penetration of various banking and financial services in the Indian economy is low. Which means, there is a scope for this sector to grow.
Over the last 10 years, the banking sector has been consolidating due to corporate asset quality challenges and low capital expenditure, both of which are behind us. Gross and net NPAs for the banking sector are on a declining trend, the provision coverage ratio has improved to 70 percent-plus levels, which indicate that banks have provided for legacy NPAs and thus provisioning cost is expected to decline. This is also reflected in the banking sectors results for FY21 (Lower stress asset creation slippages plus restructuring). This outcome on asset quality in a COVID year indicates the underlying strength of the banking system and corporate earnings.
Two, there is anecdotal evidence in the revival in profitability of capital intensive sectors such as metals, cement, pharma, power and textiles.
Both these factors clearly reflect that the worst of NPA should be behind us. In addition, in our view, banks are carrying excess floating provision, which would take care of any asset quality challenges due to COVID 2.0.
CIBIL data also shows that retail loans have held on very well. Both corporate and retail credit growth are expected to improve in the near future.
Thus, we are entering the cycle with strong balance sheet, high capitalization level, NPAs provided for, low interest rates, high liquidity and corporates in good shape. Further, technological advancement is not only resulting in higher penetration, but also in lower cost of operations. This will help lower the cost of customer acquisition.
You already have a banking ETF. What is your investment strategy for this new scheme?
The Banking ETF consists of banking stocks and is a passive strategy. On the other hand, HDFC Banking and Financial Services Fund, would invest in banks, NBFCs, HFCs, and financial services companies (both life and general insurance firms, and capital market businesses). The scheme is an active strategy and will choose stocks from a well-diversified universe within the BFSI sector, which includes stocks of large, mid and small-sized companies.
The portfolio will comprise compounders, turnaround companies and new-age businesses, including new listings through IPOs.
Are valuations attractive in the banking space, given that most sectors are priced to perfection in the liquidity driven rally?
In the recent rally, sectors such as information technology and healthcare benefitted from COVID. These have seen sharp price appreciation. In comparison, banking stocks have not given much returns. The sector currently is well-placed to potentially benefit from the revival in economic growth. Given the linkage the sector has with the GDP and low penetration, the sector could grow faster than the GDP.
Do you see fintech and new generation financial companies grabbing market share from traditional lenders and NBFCs? Are there enough opportunities in the listed space?
As of now, fintech companies are not available in listed space in India. Going by media reports, we may see some IPOs of fintech companies. When these IPOs are announced, we will have more information about these companies and we can take more informed decisions.
Apart from HDFC Housing Opportunities and HDFC Infrastructure, the house doesnt usually launch a sector fund. Is the strategy towards sector funds changing at HDFC MF? Would you be launching more sector and thematic funds?
Historically, we have considered launching a sector/thematic fund only when we see good investment opportunities. Banking and financial services put together account for one fourth of Indias total market capitalization. It offers a well-diversified investment opportunity and hence we are launching this fund.
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