LIC underinvested in banking stocks

The Life Insurance Corporation of India (LIC) is underinvested in banking stocks compared to the overall market. At the end of the March 2015 quarter, banking stocks accounted for around 18% of LIC’s equity portfolio. In comparison, banks stocks are the biggest component of the benchmark Nifty with 23.3% index weight at the end of the fourth quarter. (See table)

LIC’s exposure in lenders is far below the sectoral limit of 25% set for the banking sector by the insurance regulator.

LIC’s underweight position in banking stocks gains significance following concerns raised by Reserve Bank of India (RBI) deputy governor S S Mundra in an interview to Business Standard last week.

“As a banking regulator, we should be worried for a variety of reasons…There is a contagion risk or interconnected risk. Suppose the banking sector is not doing well and is in trouble, the equity holding of LIC will see value erosion,” he had said when asked about LIC’s investment in banking stocks.

In all, LIC owns equity stake of one% or more in 33 public and private sector banks cumulatively valued at around Rs 70,000 crore at the end of the quarter. In effect, LIC owns around 6.55% of the Indian banking sector given banks’ combined market value of Rs 10.7 lakh crore at the end of the fourth quarter.

To put things in perspective, LIC had 1% or more stake in 387 companies valued at Rs 3.9 lakh crore at the end of the last quarter. Banks have the highest weightage in LIC portfolio followed by oil & gas (15.8%) and FMCG (12.1%).

While Mundra has essentially raised concerns over LIC’s high stakes in individual banks, market experts say exposure to banking stocks is inevitable given their capital market dominance.

“There is no escape from banking sector exposure. Banks account for the largest floating stock (non-promoters share available for trading) among all sectors. And most large institutional investors have big exposure to banks,” said a senior official with a domestic broking house requesting anonymity as LIC routes its investment through it.

However, the quantum of LIC’s stake in certain banks, mainly among public sector undertakings (PSU) could raise many eyebrows. The insurance behemoth, which deploys investment from its policyholders into the equity market, owns 10% or more in 13 government banks. In percentage terms, it has the highest stake in Corporation Bank (22.54%), followed by Bank of India (14.93%) and UCO Bank (14.36%).

In contrast it seems to be under invested in fast growing private sector banks, with ICICI Bank being its biggest investment in the space with 8.11% stake, followed by Yes Bank (7.32%).

Interestingly, mid-sized banks account for a small part of LIC’s overall banking portfolio given their low valuations. The top three PSUs banks in its porfolio (in terms of stake) accounted for 5.6% of banking portfolio.

“Banking is a well regulated sector, so from a governance perspective the risk of investing in banking sector is less. As fas as the economic risks are concerned banks stocks, like any other sector, are vulnerable to the economic slowdown,” said Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance.

As per Insurance Regulatory and Development Authority of India (IRDA) norms, an insurance company can have maximum exposure of 15% in a single sector. However, exposure to banking stocks can be up to 25%.

LIC’s exposure to banking stocks has hovered between 17% and 21% in the last three years. At the end of December 2014 quarter, banking stocks accounted for 20.7% of its portfolio.

One of LIC’s biggest overweight (9% against their Nifty weightage of just 3.9%) is the metals and mining sector. “LIC is known to be a contrarian investor. The metal pack has not done well in the last 18 months. That’s the reason why it must be buying shares in the sector. On the contrary, banks and IT stocks have done really well and LIC might have booked profits in these companies,” said Sandip Sabharwal, Mumbai-based fund manager.

LIC Biggest bet on PSU Bank
Banks	Stake %	Value Rs.(Crore)
SBI	11.82	23,561.3
Central Bank	13.41	2,368.3
Bank of India	14.93	1943.2
UCO Bank	14.36	986.2
Corporation Bank	22.54	985.6
IOB	12.62	660.2
Allahabad Bank	11.46	656.8
Bank of Maharashtra	13.41	528.9
Dena Bank	12.66	360.9
United Bank (I)	12.12	290.5
All Banks	6.54	69,918.4