Banking stocks from public and private segments have lagged broader markets

Among all equity-oriented funds, banking themed funds have been underperformers, relative to the equity category, in the last one year. The one-year category average has even underperformed gold funds.

The strong rally in the Bank Nifty and BSE Bankex during 2013 and 2014 came to an end in January this year, as the RBI began pruning interest rates and exerting pressure on banks to trim their own lending rates. However, banking funds’ one-year returns were still high until July due to the base effect. But with the impact of earlier performance wearing off, returns from these funds have begun to dwindle. The pace of rate cuts undertaken by the RBI has also accelerated in the second half of the year. In its September monetary policy review, the RBI reduced its policy repo rate by a bigger-than-expected 50 basis points to 6.75 per cent, which is a four-and-a-half-year low.

The performance of banking stocks could look up if there are concrete signs of economic pick-up, which would lead to better credit offtake. Inflation trending down and falling crude oil prices coupled with lower interest rates could trigger a turnaround in the slowing economy.

Funds underperform

A key feature of the recent decline in banking stocks is that both public and private sector banking stocks have lagged broader markets. Private banks, which were resilient in earlier years, also tripped during the recent decline. Funds that invest exclusively in this sector as well as those with a broader mandate of investing across financial services have been among the underperformers, even as a few outshone their benchmark indices — Bank Nifty and BSE Bankex — in the last one year.

Among the banking funds, nine have more than a one-year track record while five of these funds were able to fare better than the benchmark’s losses of 9.5 per cent.

Over a three-year period, only ICICI Pru Banking & Financial Services, Reliance Banking and Religare Invesco Banking have managed to beat their benchmark return of 10.3 per cent. HDFC Bank, the most preferred banking stock in the midst of the recent volatility, has been able to deliver a 12 per cent gain in the last one year.

On the other hand, the public sector giant SBI, which figures in most fund portfolios, has tumbled 27 per cent in the same period. Some of the private sector banks that had given high returns in the past have started to lose sheen. ICICI Bank led the decline plunging 28 per cent, Axis Bank has fallen around 9 per cent and YES Bank has slipped 2 per cent.

Baroda Pioneer Banking & Financial Services and Sahara Banking & Financial Services delivered a negative return of 11.4 per cent each in one year. Taurus Banking & Financial Services also continued to lag, plunging 16.7 per cent over the last one year.

Birla Sun Life Banking & Financial Services, which has outdone most peers, contained its downside to 2 per cent. Though ICICI Pru Banking & Financial Services has declined 6.8 per cent during this period, it has a solid long-term track record of beating the benchmark with a good margin.