Betting on strong earnings and growth prospects coupled with better asset quality experience and operating performance, foreign portfolio investors (FPIs) have increased their stake in all major private banks in the range of 3-22 per cent during FY21.
Abandoning PSU banks
“FPIs typically look at three factors which include operational efficiency of the franchise, return ratios and earnings growth. All this finally boils down to return on assets (RoA) and return on equity (RoE), which are obviously higher in private sector banks,” said independent analyst Ajay Bodke.
On the other hand, FPIs’ holding in public sector banks remained muted in FY21. Bank of Baroda and Canara Bank witnessed 2.32 per cent and 1.28 per cent increase in FPI holding, while the FPI stake in country’s largest public sector lender SBI went up merely by 0.35 per cent during the period.
“One of the primary reasons for not increasing stakes in PSU banks (except PSBs like SBI) would be the relatively not so stable balance sheet and inadequate capital positioning,” Siji Philip, Senior Research Analyst, Axis Securities said, adding, “Since the Covid situation is still dynamic, any increase in asset quality stress could have adverse impact on PSU balance sheets (barring a few like SBI) which are on the borderline of capital adequacy and have comparatively weaker balance sheets compared to private banks.”
Bandhan Bank, top pick
Among private banks, FPI holdings in Bandhan Bank witnessed the highest increase to 34.91 per cent in March 2021 from 13.05 per cent in March 2020 followed by Yes Bank at 13.77 per cent (1.86 per cent) and RBL Bank 31.85 per cent (25.53 per cent) during the period.
“In case of Bandhan Bank, the promoters had to dilute approximately 21 per cent stake during the year in order to comply with licensing conditions of the Reserve Bank of India. This stake was then taken up by FPIs,” Axis Securities’ Philip said, adding, “while SBI and other top banks had invested in YES Bank picking up stakes as part of an RBI-supervised plan to put the latter back on the rails. Post the FPO in July 2020, some of them brought down this stake which was lapped up by FPIs.”
“Essentially, equity markets are forward looking. Hence, people are expecting a turnaround in the bank’s (Yes Bank) performance over the medium term and that’s why they (FPIs) want to buy in earlier,” Bodke explained.
Mutual funds cut stake
While FPIs have increased their bet on private lenders, mutual funds have pared down their stake in almost all the private lenders barring Federal Bank during the previous fiscal.
“One of the major reasons for the diverse trend will be that equity mutual funds, having high holdings in private banks the previous year, have been seeing redemption pressure over the past one year which will have resulted in offloading these holdings,” Philip said.