Why Roshan Chutkey of ICICI Prudential MF thinks a K-shaped economic recovery will benefit banks

Why Roshan Chutkey of ICICI Prudential MF thinks a K-shaped economic recovery will benefit banks

The COVID-19 pandemic has led to stress in the banking sector. But Roshan Chutkey, fund manager, ICICI Prudential Banking and Financial Services scheme is not disturbed. He says bank funds are cyclical. Speaking to Vatsala Kamat, Chutkey, who is optimistic on India’s economic recovery, discusses why he is comfortable betting on the larger banks. He also suggests ways for investors to ride the banking sector cycle.

Your top four holdings account for half the portfolio and are frontline banks. Is it not risky given the stress in the sector due to the pandemic?

We are seeing a K-shaped economic recovery from the pandemic. The upper hand of ‘K’ is represented by large and mid-sized corporates, which have healthy cash flows and strong balance sheets. The lower hand is represented by micro, small and medium-sized businesses (MSMEs) that are in distress right now.

The top four stocks in our portfolio service the resilient part of the economy. Besides, their balance sheets carry adequate provisions to shield from any potential stress that could emanate from the lingering impact of the second wave.

Some investors argue that a BFSI scheme is more all-weather than other thematic funds. Do you agree?

A BFSI fund is a cyclical scheme. It’s best for small investors to invest through a systematic investment plan (SIP) instead of trying to time the cycle. Timing the cycle is a fund manager’s job.

At present, the banking sector is transitioning from an early recovery phase to the mid-cycle. But I sense that it may be bumpy since economic recovery is yet to trickle down to the MSMEs. For this, the government spending has to increase, which will eventually nudge private sector capital expenditure. Exports must support, which is possible given that developed economies are on the road to recovery. If these two elements fall in place, the banking cycle will be on a stable growth path. I am optimistic we are heading there.

We have a significant exposure to such fee-based financial services firms compared to the benchmark indices. But valuations are important. At this point in time, non-lending businesses are fully valued in many cases. So, I wouldn’t take fresh exposure to this segment. On the contrary, lending businesses still have reasonable upsides in spite of the rally we have seen.

Acquisitions are best done when valuations are suppressed or companies are liquidity starved. At this point in time, neither is the case. Well, there could however be M&A activity triggered by priority sector lending needs or in pursuit of a banking license (there are enough number of PSU bank targets).

What are the biggest risks to the banking and financial services sector?

The main risk is deterioration of the business cycle. This could be because of exports not taking off, or lack of bank funding to MSMEs, or even the US Federal Reserve turning hawkish ahead of expectations, which may lead to US dollar appreciating. In turn, it may lead to tight liquidity conditions, which can cause serious problems as we are just getting out of a weak economic cycle.

But I believe that the probability of this risk playing out is low. I expect a confluence of monetary plus fiscal support to continue, which will help us emerge out of the pandemic stress. I would not alter the portfolio at this point. It is positioned to wade through the known unknowns.

What kind of downside protection is there in a BFSI sector fund for an investor?

For a cyclical fund like this, understanding the macroeconomic cycles is very important. The capability of the fund manager to spot signals of change in the cycle determines the performance of the fund.

For an investor therefore, it is not advisable to invest lumpsums in such sector funds. A BFSI fund is like the central nervous system of the economy, but it is best to participate through a systematic investment plan. I think an investor can have 8-10 per cent exposure to a BFSI fund within the equity basket. This is assuming that he/she has diversified equity funds in the portfolio, which also have an exposure to this sector.

The views and investment tips expressed by experts on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Asia-Pacific banks to follow region’s K-shaped economic recovery from pandemic

The recent resurgence of COVID-19 in parts of Asia-Pacific is likely to hit economic recovery, delaying the process of normalization of bank earnings in some emerging markets in the region, according to S&P Global Ratings analysts.

Asia-Pacific is seeing a “K-shaped” economic recovery as vaccine rollouts in the region have been relatively slower than those in developed nations such as the U.S. and U.K. The global banking sector is clawing back to normalcy and lenders' balance sheets are starting to get better, a process that may take longer in Asia-Pacific, the analysts said at a July 28 webinar on the rating agency’s Global Banking Outlook Midyear 2021 report.

Lenders in Indonesia, Thailand and the Philippines face asset quality concerns following the latest waves of infections. Indonesia has been one of the hardest-hit countries, they noted.

The negative outlook on Indonesian banks reflects the downside risks that could emanate from a large pool of restructured loans, said Geeta Chugh, senior director and sector lead for India, South and Southeast Asia at S&P Global Ratings. Nearly 18% of loans at the country’s lenders have already been restructured, and that number could extend to as high as 25%, Chugh said.

Various forms of relief to lenders, including moratoriums on repayments in Thailand and the Philippines may keep chunks of loans unresolved until 2023, Chugh said.

“The most important factors for the banking sector will be the resumption of financial and economic activity, government support for worst-affected sectors, particularly [small to medium-sized enterprises] and low-income households, and finally, liquidity concerns,” Chugh said.

Major economies

Among major Asian economies, the economic disruption from the second wave of infections in India will be a challenge, Ratings said.

“What distinguishes India from some of the other systems is that Indian banks did not enter this pandemic from a position of strength. The lenders were always struggling with a high level of weak loans well before the pandemic struck,” Chugh said.

The overall expectation for India is that the weak loans will remain elevated at 11%-12% in the next 12 to 18 months. Credit losses in India could remain around 2.2% before recovering to 1.8% in 2023.

However, after recent revisions, Ratings now expects that credit losses will remain below the expected long-term average for many other countries in the Asia-Pacific region, despite the “severe economic hardship” caused by the pandemic. “This solidifies our views that downside risks are moderating amongst Asia-Pacific banks,” Chugh said.

While credit losses as the percentage of loans is likely to shrink at Asia-Pacific banks over the next two years, China is a major exception, having taken its pain up front with close to $300 billion in credit losses in 2020. Still, the fallout of the pandemic is not entirely over, Chugh said, adding that in total, Chinese banks “will need to tackle” a little over $1 trillion in credit costs for the period of 2020-2022 due to COVID-19 and other asset quality problems.

Meanwhile, lenders in Australia and Singapore had frontloaded provisions in 2020 in anticipation of an economic downturn, resulting in healthier banks.

“We also note that the asset quality stress on many of the region’s financial institutions was at a historically low level before the pandemic struck, whether it’s Singapore or Australia,” she said, adding that banks in these countries had low credit costs before the pandemic, so a spike in credit losses in 2020, while significant, was off a very low base.

Most CFA Institute members predict K-shaped recovery from COVID-19 pandemic: Survey

In India, 42 per cent of respondents believe that a ‘K-shape’ economic recovery is forming, where different parts of the economy are recovering at different rates, times or magnitudes. (Representational image)

A significant percentage of CFA Institute members believe that a “K-shaped” economic recovery is forming, where different parts of the economy are recovering from the COVID-19 pandemic at different rates, times or magnitudes, as per a survey. According to the survey of 6,040 global respondents by CFA Institute, the global association of investment professionals, 44 per cent predicted a K-shape recovery, indicating a globally divergent recovery.

The K-shaped recovery marks a distinct shift away from the “hockey-stick shaped” recovery predicted last year, when close to 75 per cent of respondents thought that any upturn would be slow or stagnant in the short term, before picking up in the medium term, the survey said.

“The post-pandemic world is quite visibly a volatile one, and everyone is eyeing the nature of our economic recovery from the same. I believe the most predictable bounce-back would be of a K-shaped nature, wherein different parts of the economy would recover at different rates. “It is, of course, a certainty that COVID-19 is bound to affect all walks of life and will influence Government policies, Tax regulations, and the entire Indian financial landscape,” said Vidhu Shekhar, CFA, CIPM, Country Head, India, CFA Institute.

The survey was fielded to the global membership of CFA Institute across all regions and jurisdictions where the organisation has the representation. The survey was conducted from March 8 – March 28, 2021, when the effects of the second wave in India had not yet been felt. In India, 42 per cent of respondents believe that a ‘K-shape’ economic recovery is forming, where different parts of the economy are recovering at different rates, times or magnitudes.

Around 37 per cent of members believe that the economy is on a steady path towards fully recovering and operating at a pre-pandemic pace, while 11 per cent believe that a ‘W-shape’ economic recovery is forming, whereby the economy will see-saw after an initial strong rebound. The survey further said that 52 per cent of Indian respondents believe that equity markets have recovered too quickly on the impulse of monetary stimulus; they are now out of pace with the real economy and a correction is to be expected within the next 1-3 years.

Globally, China’s recovery is considered to be ahead of most markets; respondents in that country report more optimism for a full recovery in one to three years (39 per cent).

In general, emerging economies appear to be less optimistic about economic recovery. Only 23 per cent, 25 per cent, and 27 per cent of respondents in Latin America and the Caribbean, the Middle East, and Africa, respectively, believe their economy is already on a steady path to recovery. “They also believe in a higher proportion that a real economic recovery will not occur and that long-term stagnation will ensue,” the survey noted.