Banking funds have taken a beating in the first half of the current calendar year as tepid loan growth and poor asset quality weigh on stocks in the sector.
According to data from Value Research, banking funds gave negative returns of 11.5% between January and June, a period when the benchmark BSE Sensex remained flat. The underperformance is in stark contrast to the way the funds performed a year ago, with returns of more than 25% for the first six months. In fact, banking funds had emerged as the top-performing equity fund category last year, with returns of more than 55%.
According to market experts, the sector has been struggling due to drying up of liquidity and deteriorating asset quality.
?The issue of rising non-performing assets (NPAs) continues to be a huge overhang for the sector. This has put the banks? credit quality under stress. PSU banks, which make a big chunk of banking equity funds, in particular, have suffered due to the change in provisioning norms by the Reserve Bank of India (RBI),? said Shankar Raman, senior vice-president and head (investment products and advisory), Centrum Wealth Management. ?Apart from this, the rise in bond yields has led to mark-to-market losses for the banks,? Raman added.
Concerns are also emerging on the ability of banks to raise additional capital needed under the Basel-III norms, which could add to the underperformance of bank stocks and banking stocks in the month ahead. Interestingly, banking ETFs have performed even worse in the first half of the current calendar year, with the category giving negative returns of nearly 17%.
Market observers feel that since the banking sector has a high weightage in the markets, it is the first sector to take a hit when markets fall. ?Market participants were overweight on the sector in the beginning of the year as the rate-cycle was comprehensively reversed. But the steep depreciation of rupee, triggered by fears of quantitative easing (QE) tapering off, has quashed all hopes of any further rate cuts,? said Kaushik Dani, head (equity), Peerless Funds. In the year to date, the BSE Bankex ? the index of banking stocks ? has shed nearly 13% and underperformed the BSE benchmark index Sensex, which gained 2.7%.
According to analysts, fund managers were not prepared for this underperformance. ?Fund managers did not anticipate the sector to underperform to this extent with respect to the overall markets,? said Sachin Jain, analyst (research), ICICI Direct.
