Stocks in the banking space had emerged as the favourite amid other consumption sectors till the beginning of November last year, after which the rally subsided. However, after a short lull of a few months, banks have once again caught the fancy of fund managers.

At a time, they say, when in the benchmark indices financials contribute one-fourth of the total weightage, their equity asset exposure in banks is still lesser. "There is further room to increase our fund flow in the banking sector -- one of the strongest banking systems globally," says the chief investment officer of a large-sized fund house.

For instance, the latest statistics from the Securities and Exchange Board of India (Sebi) reveal that of the total equity assets of fund houses, the exposure in banks has increased over 100 basis points (one basis point is one hundredth of a percentage point) in the March quarter to 17.2 % compared with 16.12 % in the December quarter. This was an increase of 3.4 % compared with the March quarter of the financial year 2009-10.

"We remain invested in the banking sector. It's a safe long-term strategy to play the capex cycle and consumption sector. The domestic growth story is strong and funds' lending by banks will continue," says the equity head of a mid-sized foreign fund house.

Other fund managers agree. "We continue to buy specific stocks, especially from the private bank space. Besides, there are a few state-owned banks we are betting on," says the chief investment officer of a large bank-sponsored asset management company.

Has the sharp correction in the banking stocks not been a deterrent? Fund managers admit for the short term, banking stocks will continue to remain under pressure as net interest margins (NIMs) or the spread between deposits and yields on advances will be under pressure and affect profitability. But, according to them, there are several stocks that were battered in the previous trading sessions. "Rather, they make good valuable picks in our portfolios," they add.

Further, of the industry's debt assets, fund houses have pumped in over 65 % in bank papers, including Certificates of Deposit (CDs) and Fixed Deposit (FD). Moreover, taking into account MFs' investment in non-banking financial companies (NBFCs), the proportion has gone well over 70 %. This is a rise of over 10 % in the second half of 2010-11.

Source: [Business Standard]