Bullish on public sector banking space: Sundaram BNP

Sundaram BNP Paribas Mutual is launching a new open-ended fund called Sundaram Financial Services. The fund will remain open between April 17 and May 14. The fund house also plans to launch an entertainment opportunity fund next week. It expects to raise Rs 1000 crore from this fund.

J Venkatesan, Fund Manager Equities, Sundaram BNP Paribas Mutual, said the farm loan waiver and forex derivative losses have cause huge price and valuation distortions in banking stocks. “Both crises are good entry points for long-term investors looking to enter the banking space. We will immediately look at the public sector banking space where the concerns have been more than pricing and valuations. We will look at the private banking space after the results as some clarity will emerge on the forex derivative losses which some of the banks where expected to have. We will also look at some growth stories in the insurance proxy plays and brokerages etc. It will be an ideal mix of all the three verticals in the banking space.”

Excerpts from CNBC-TV18’s exclusive interview with J Venkatesan:

Q: Are you comfortable launching this fund at this point in time? We have seen banking stocks take a big correction. After that, we have seen inflation concerns and also concerns related to interest rate hike.

A: The timing could not have been much better because the two-events has created extreme distortion in valuations and prices of banking stocks. One was the farm loan wavier in the case of public sector banking space and two forex derivative losses in the case of private sector banks. Both have created extreme distortion in the values of all banking stocks. This is a good timing for any long-term investors. Both crises are good entry points for long-term investors looking to enter the banking space.

Q: But what about the interest rates scenario and the fact that we are going to be looking at pressure on the NIM front of banks with inflation fears and monetary policy being put into place? How are you going to be reading or y scaling your exposure over the next six to eight months?

A: Interest rate and inflation is definitely a concern not only for the sector but also for the overall market as a whole. Our take on inflation is that most of it is imported inflation. Commodity prices are going up when global growth is slowing down, so it cannot happen on a continuous basis.

Imported inflation would subside going forward. The difference between the two-year US treasury yield and Indian yield is quite high at 7%. This also cannot continue for long. After six-months, inflation and also interest rates could come down. That could provide a good trigger for any long-term investor who enters banking space today.    

Q: Without getting into individual stocks, would you look at the brokerage space after the 60-70% fall that we have had in that sector? Do you think there are enough opportunities over there?

A: Yes, there are enough opportunities in the brokerage space because it is one of the high growth industries, which we have seen. Volumes have dropped more than 40-45% across almost all broking houses, but these are all short-term blips in the long-term growth story of this sector. We will definitely look at certain stocks where we are comfortable with valuations.

Q: Even though you will be focusing on individual growth stories, could you give us a sense of how the fund would get allocated between public and private sector banks, midcap banks, and banks that could be potential acquisition targets?

A: We will immediately look at the public sector banking space where the concerns have been more than pricing and valuations. We will look at the private banking space after the results as some clarity will emerge on the forex derivative losses which some of the banks where expected to have. We will also look at some growth stories in the insurance proxy plays and brokerages etc. It will be an ideal mix of all the three verticals in the banking space.

Q: What is the kind of returns that you expect this fund to accrue? What is the fund’s requirement at this point in time? How much are you looking to raise? 

A: We are looking to raise on both funds as we launching one more entertainment opportunities fund. In both the funds, we are looking to raise more than Rs 2,000 crore. Normally, we don’t give any return guidance for investors. Most public sector banks are quoting at 0.8 times price to book with a RoE of 17% today. So, even marginal normalization of the external environment would give kind of superior returns as compared to market returns.

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