Mutual Funds Boost Private Bank Holdings; HDFC Bank Sees Record Surge

Top private lenders experienced an increase in mutual funds (MF) shareholding, primarily due to promising growth prospects in the sector. An analysis by Moneycontrol of data from the top eight banks revealed an upward trend from June 2023 to June 2024.

HDFC Bank, the largest private sector bank in India, saw the most significant rise in MF shareholding, increasing from 17.6% to 24.83%, a 723-basis-point jump. Kotak Mahindra Bank followed, with MF shareholding reaching 16.52% in June 2024, up from 9.5% in June 2023, marking a 702-basis-point increase. IndusInd Bank's MF shareholding rose by 5.93% to 19.91% over the year, a 593-basis-point change.

ICICI Bank was the exception, with a slight decrease in MF shareholding by 0.04%, bringing it to 29.18% as of June 2024.

This trend coincided with a rise in the banks' share prices. For example, Axis Bank's closing share price on June 28, the last day of the reporting quarter, was ₹1,266.46, up from ₹987.54 on June 30, 2023. Similarly, Federal Bank's share price increased to ₹177.09 per share from ₹126.5 per share over the same period.

With the exception of Kotak Mahindra Bank and HDFC Bank, all other banks' shares traded positively.

During this period of increased MF shareholding in private banks, the Nifty Private Bank index rose from 22,953.30 points to 26,144.22 points, an increase of 3,190.92 points.

Despite mixed quarterly results, the private banking sector remains strong, attracting significant investor interest. For instance, IIFL Securities reported on July 12 that MFs purchased HDFC Bank shares worth over ₹42,000 crore in the first half of 2024, a substantial increase from previous years.

In the first quarter of fiscal 2025, private sector banks showed a mixed trend in their performance. Collectively, they reported a 23% year-on-year (YoY) increase in net profit, although they faced pressure on net interest margins.

Banks indicated some seasonal challenges in Q1FY25 due to rising heatwaves and stress on agricultural portfolios. However, they anticipate growth and positive trends across various parameters moving forward.

Earlier this month, Mutual fund (MF) managers have recently reduced their investments in public sector banks (PSBs), under the belief that the stock prices of these banks may have peaked. This shift in strategy is also influenced by more attractive opportunities in the private banking sector.

In March, mutual funds offloaded PSB stocks worth ₹2,500 crore, while they invested ₹4,900 crore in private bank stocks. Over the past three quarters, MFs have consistently been net sellers of PSB stocks.

"In our banking and financial services fund, we now hold only one PSB, down from three last year. This adjustment reflects our expectation of moderated profit growth in the financial year 2025," said Amey Sathe, a fund manager at Tata Mutual Fund.

Fund managers note that the significant rise in PSB valuations over the past 2-3 years has brought them to a fair valuation for larger PSBs and a stretched valuation for smaller ones. Conversely, the recent underperformance of many private banks has improved their valuations.

"Post-COVID, PSBs were attractive due to favorable valuations, leading to increased allocations. Now that much of the re-rating has occurred, exposure has been reduced. Further re-rating will depend on sustained financial performance. Meanwhile, private bank stocks, currently valued near their long-term averages, are expected to perform better in the medium to long term," explained Gaurav Kochar, a fund manager at Mirae Asset Investment Managers.

This reallocation has notably altered MF holdings in banking stocks over the last quarter. For instance, the MF ownership in HDFC Bank, the largest private bank, increased from 15.1% to 20%, while holdings in State Bank of India, the largest PSB, decreased from 12.9% to 11.5%, according to Capitaline data.