Conflicting signals | MFs aren’t walking the talk on their optimism for banks

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26 Aug, 2025 12:21

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While most fund managers have publicly asserted that the domestic lenders remain their preferred bet in the market because of their reasonable valuations as well sanguine outlook on growth, their actions suggest otherwise.

As per Moneycontrol’s Market Sentiment Survey in June, domestic fund managers had suggested that prospects for banks were the brightest in 2022 followed by information technology and capital goods. Banking sector received the vote from more than half of the surveyed fund managers.

Yet, a look at the mutual fund activity data for June suggests that privately mutual fund managers have been trimming their holdings in lenders in-line with their foreign peers.

In June, share of banks in the total equity assets under management of domestic mutual funds slumped to 17.5 percent from one-year high of 17.9 percent in May, according to data compiled by Motilal Oswal Financial Services.

Within a month, mutual funds’ exposure to banks has come down to levels seen in January 2022. That said, mutual funds have reduced their exposure to the sector three out of the six months so far this year.

Similarly, three out of the top five stocks sold by mutual funds in June in terms of value were banking names. In June, ICICI Bank, Axis Bank, HDFC Bank and State Bank of India were among the top 10 most sold stocks for mutual funds, as per data compiled by IIFL Securities.

The selling from domestic mutual funds appeared in conjunction with the ongoing dumping of banking names by foreign portfolio investors. Foreign portfolio investors net sold financial services stocks worth Rs 13,615 crore with banks believed to consist of a large chunk of that number, said dealers.

The selling in banks from two of the biggest institutional investor cohorts is in contrast to the narrative that banks are likely the safest bet given benefits from an upswing in credit offtake, healthiest balance sheet in recent years, and improvement in margins because of rising interest rates. The Nifty Bank index has fallen merely 2.3 percent so far in 2022 as against 8 percent decline in the benchmark Nifty 50 index.

Earnings Outlook Strong

The outlook for the banking sector’s earnings remains sturdy after the strong earnings performance of the March quarter. In June quarter, the sector’s net profit is expected to grow north of 30 percent on a year-on-year basis driven by strong loan growth and control on costs.

“Banks are likely to report a healthy growth in advances with large private banks continuing to gain market share. Deposits growth should also be healthy but would lag advances growth for major banks,” brokerage firm Sharekhan said in a note.

With asset quality issues now in the rear-view mirror for most lenders, market’s focus has been on loan growth and utilization of the access capital on the books of many big lenders towards fueling new phase of growth.

“With systemic loan growth exhibiting strong signs of revival, we do not expect any challenges in terms of credit growth for banks,” said Axis Securities in a note.

However, the ongoing uncertainties in the global economy and corporate India dragging its feet on new capital expenditure, institutional investors are likely expecting some disappointment on the loan growth metric in the coming quarters.

Brokerage firm IIFL Securities highlighted these concerns in its recent note suggesting that banks are not expectant about capex revival, and are “wary of consumer demand, as inflation hits spending ability and higher rates bite into auto or home loans”.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.