BoI MF has launched its Banking and Financial Services Fund.
Despite financials being a third of market indices which means most diversified funds already have a sizeable chunk of these stocks in their portfolios, Nilesh says it still makes sense for investors to consider such a sector fund as diversified funds typically invest in index heavyweight large banks while the real alpha in this space lies in its diverse businesses spanning lending as well as non-lending models.
While some experts may suggest that buying lenders in a rate cutting cycle is unwise as margins will be under pressure, Nilesh argues that NIM pressures will only ease in the coming quarters as bulk of the cycle is behind us. Moreover, better asset quality and lower incremental cost of acquisitions due to adoption of technology will likely more than offset NIM pressures.
Credit growth has now picked up and is finally into double digits on the back of strong growth in retail loans and borrowings from few growth sectors like renewables and power T&D. Nilesh expects credit growth to get into the mid-teens – which augurs well for earnings growth for lenders.
Capital market stocks are seeing pockets of very high valuations while others are slightly above long term averages. One must however keep in mind that the huge growth runway ahead for this segment does perhaps warrant some growth premium to be built into valuations.
Nilesh likes fintechs, asset managers, wealth managers and exchanges within the non-lending space.
Among lenders, he prefers PSU banks over private sector banks as their improving RoEs and improving credit quality leave some more room for valuation catch-up.
The new portfolio will be overweight (vs benchmark) non-lenders and within lenders, will be overweight PSU banks.
From an overall asset allocation perspective, the fund is likely to be around 80% invested in lenders and 20% in non-lenders.
Nilesh’s key stock selection filter is execution capability, as that is the key in the BFS space which has ample growth opportunities but which can be filled with minefields for businesses that cannot maintain proper balance between quality of business, pace of growth and consistency in RoEs.