Funds Buying Battered India Bank Stocks See Cyclical Rebound
(Bloomberg) -- Battered India bank stocks, the worst performers this year on the benchmark equity gauge, are being picked out by some funds that see them rebounding with the economy as the coronavirus-triggered lockdown is eased.
“Cycles come and go and we continue to have a long-term view that India has tremendous growth ahead including in credit and banks we hold,” said Nuno Fernandes, who helps oversee $1.5 billion in emerging market assets at GW&K Investment Management LLC in New York.
After a peak in January, shares in Indian lenders are now trading close to their lowest level since 2016 as the prospect of the first economic contraction in 40 years triggers concern that bad loans will surge. The central bank has cut borrowing costs to a 20-year low and the government pledged 21 trillion rupees ($277 billion) in stimulus to revive growth.
Picking out banks with strict lending criteria prompted Fernandes and colleague Tom Masi to allocate more shares of HDFC Bank Ltd. and Kotak Mahindra Bank Ltd. to their funds, which include the AMG GW&K Trilogy Emerging Wealth Equity Fund that has outperformed 94% of its peers over five years.
“They will get more and more flows in deposits, which will allow them to have higher profitability and invest back to continue having this competitive advantage they have versus the public sector banks,” Fernandes said.
Fidelity International Ltd. investment director Medha Samant said the $480 billion asset manager is a “long-term” holder of HDFC Bank and bought shares of “high quality” financial companies as valuations tumbled. The firm kept an overweight position in the sector in its Asia ex-Japan allocation as it increased holdings of private banks and insurance firms when the benchmark Sensex index sank by a record on March 23.
“We like the high quality financial plays,” Samant said. “This sector has been the most impacted as the market worries about rising bad loans, government intervention. But on the other side, valuations for most of the financial names are at historical lows.”
Still, Moody’s Investors Service said earlier this month that stress among Indian lenders may be “deeper and broader” than it thought, when it cut the nation’s sovereign rating by one step to the lowest investment grade. India already has the world’s worst bad loan pile, and asset quality may weaken further, Moody’s said, as it lowered long-term ratings on HDFC Bank Ltd. and State Bank of India, among others, on June 2.
That outlook doesn’t deter Ajay Krishnan, who manages $5.07 billion in equities at Wasatch Advisors Inc. in Salt Lake City. He also favors HDFC and Kotak Mahindra banks. He’s also increased his allocation to Bajaj Finance Ltd., which lost half its value from a high in mid-February, on the view that the lender’s “long term story is in tact” and it will more than recoup the losses. Other picks include AU Small Finance Bank Ltd. and Aavas Financiers Ltd., based on the quality of their balance sheets and management, he said.
“You don’t often get high conviction and high return at the same time, you need dislocations in the market,” Krishnan said. “I don’t want to minimize the economic and health impact of it but from an investment standpoint we are very excited.”
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