24th November 2023

Banking & Financial Services Sector

Invest in India’s Structural Story

The financial sector is the backbone for any economy and is the key beneficiary and catalyst of economic recovery. The
segment appears to be well-placed for meaningful growth with tailwinds like rising interest rates, improving credit
growth, adequately capitalized balance sheets etc.
Government thrust on infrastructure and manufacturing is expected to provide impetus to the credit demand. Retail credit
has been growing at steady pace over the last few years and is expected to grow given the under penetration of retail
credit in India.
Indian banks have lagged broader market indices and have underperformed significantly over past 3 to 5 years. Financial
companies are reasonably placed to provide comfort, especially considering improving outlook for profitability. Thus, we
recommend a portfolio of financial companies with a long historical track record of profitable growth and prudent capital
allocation, that stand to benefit from the reforms.

Why Banking & Financial Services (BFSI) Sector Now? – A Narrative

➢ Stronger Balance Sheets & Cleaner Books

Banks and NBFCs went through some rough times between 2015 and 2020 led by Demonetization, NPA Crisis, IL&FS
Default and Covid-19 Pandemic. But all these are in the past and we are now in an upcycle. Bank balance sheets are
now stronger with NPAs at an all-time low, this aids in sustained pick-up in credit growth.
While Nifty 50 has a ROE of 15%, most of BFSI subsegments’ return ratios are stronger or comparable to Nifty 50.

Source: DSP Mutual Fund, Indian Brand Equity Foundation.

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➢ Underperformance versus Nifty 50 TRI– Possibility of a turnaround
BFSI forms 38% of the profit pool of the Top 500 companies but is just 26% of the market cap. Further, the last 10-year
profit growth for BFSI was 17% compared to 10% for the Top 500 companies excluding BFSI.
Over the past 10 years, Nifty Financial Services TRI Index has outperformed frontline indices like Nifty 50 TRI by 2.6%
and generated a CAGR of 16.4% vs Nifty 50 TRI CAGR of 13.8%.
The BFSI sector has underperformed Nifty 50 Index since Sep-19. The current underperformance vs. Nifty 50 index is
near Great Financial Crisis (GFC) bottom levels and has the possibility of mean reversion. As of 20th Nov 23, over 4 year
period, Nifty Financial Services TRI has underperformed Nifty 50 TRI and Nifty 500 TRI by 5.1% and 7.7% respectively.
The historical data suggests, Nifty Financial Services TRI has outperformed Nifty 50 TRI 61% of the times and
outperformed Nifty 500 TRI 59% of the times.

Source: DSP Mutual Fund, Indian Brand Equity Foundation, MFI Explorer

➢ Valuation Comfort

Source: DSP Mutual Fund, Indian Brand Equity Foundation

Valuations for Nifty Financial Services Index are at reasonable levels. 17 year average PB (from Apr 06 to Dec 22) of
Banks is 2.2x, and current valuations are close to this levels. Also, Nifty Financial Services Index is trading at a PB of 3x,
below its 17 year historical average of 3.2x thus providing a margin of safety.

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➢ Expected Uptick In Bank Credit Growth and Private Capex Cycle
Total credit to private non-financial companies as % of GDP for India stands at 90% vs US at 151%. Total credit to
households as % of GDP for India stands at 37% vs for US average of 74%.
Credit under the personal finance segment (excluding housing) rose at a CAGR of 15.5% from FY16 to FY19 and stood
at US$ 151.75 billion in FY19.
Demand has grown for both corporate and retail loans. Services, real estate, consumer durables and agriculture allied
sectors have led the growth in credit. Bank Credit growth is at 10 Year high, forthcoming growth will be aided by pick-
up in private capex.

Source: DSP Mutual Fund, Indian Brand Equity Foundation

➢ Trends in Gross Savings & Number of High-Net-Worth Individuals

In 2021, India’s gross savings was at 29.3% of GDP amounting to US$ 930.56 billion. In 2022, India’s gross savings stood
at 29.84% of GDP.
The number of HNWIs in India reached 308,000 by the end of 2021. Between 2014 and 2020, the number of HNWIs in
India posted a steady rise, increasing at a CAGR of 4.1%. Wealth management also seems to be an emerging segment
with expectations of a rise in HNWIs.

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➢ Growth in Capital Markets
Capital markets have seen strong growth in last 10 years. The number of Demat accounts in India reached 12.66 crore
in August 2023. Vibrant capital markets are evident through large number of listings. In FY22, the number of listed
companies on the NSE and BSE were 2,012 and 4,807, respectively. In FY22, US$ 14.55 billion was raised across 127
initial public offerings (IPOs). In FY23, US$ 7.00 billion was raised.
As of October 2023, AUM managed by the mutual funds industry has grown at a phenomenal rate of 16% over past 5
years. The assets have more than doubled in the period to reach a roaring 46.72 lakh crore AUM. SIP flows are also
breaking records and making all-time highs month on month with current run rate of close to 17,000 crores. Trailing
12 months SIP flows stand at stellar 1.76 lakh crore (21.16 billion dollars). All this shows inherent robustness and
strength in gaining traction and acceptability towards mutual fund at a large.

Source: DSP Mutual Fund, Indian Brand Equity Foundation, AMFI

➢ Scope for Insurance

Overall insurance penetration is as low as 4% for India compared to the world averages. Also, non-life penetration level
is lowest among top 20 markets globally at just 1%.
The life insurance segment has grown significantly in recent years. The gross premium collected by life insurance
companies in India increased from US$ 39.7 billion in FY12 to US$ 89.3 billion in FY22. Non-life insurance segment has
been rising as well.

➢ NBFCs Gaining Prominence

Non-banking financial companies (NBFCs) are rapidly gaining prominence as intermediaries in the retail finance space.
NBFCs finance more than 80% of equipment leasing and hire purchase activities in India. The public funds of NBFCs
increased from US$ 278.23 billion in 2016 to US$470.74 billion in 2020 at a CAGR of 14.04%.

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 BFSIs have largely grown at a pace superior to the economy. Over last 15 years from FY08 to FY23 Nominal GDP has
grown at a CAGR of 12.1% and bank credit growth has been in line at 12.6% however NBFC & HFC Credit have seen a
growth of 16.7% over the years.

Source: DSP Mutual Fund, Indian Brand Equity Foundation

➢ Policy Support By Government

The government has approved 100% FDI for insurance intermediaries and increased FDI limit in the insurance sector
to 74% from 49% under the Union Budget 2021-22.
Following are some other policies which support and augment growth in BFSI sector:
❖ Pradhan Mantri Jan Dhan Yojana (PMJDY) - Bank accounts opened under GoI Pradhan Mantri Jan Dhan Yojana
are over 486 million with deposits of over ~US$ 24.2 billion in beneficiary accounts. 50.18 crore beneficiaries
banked till August 2023. PMJDY Accounts have grown three-fold from 14.72 crore in Mar’15 to 46.25 crore as
on 10th August 2022.
❖ Other schemes which have impacted banking and financial sector are - Pradhan Mantri Suraksha Bima Yojana
(PMSBY), Stand Up India Scheme, Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), Atal Pension Yojana
(APY).

➢ Emerging Opportunities and Recent Trends & Challenges In BFSI Space:

Market cap of BFSI continues to grow but mix in BFSI is changing with increase in exposure to NBFCs, Insurance, Capital
Markets and Fintech. New opportunities in listed space are emerging into businesses such as – MF & Insurance Broking,
Payment processors, Stock Broking & Wealth management, Loan DSAs (Direct Selling Agents) and Insurance 3rd party
administrators to name a few.
New distribution channels in insurance sector such as bank assurance, online distribution and Non-Banking Financial
Companies (NBFCs) have widened the reach and reduced operational costs.

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 As the RBI allows more features such as unlimited fund transfer between wallets and bank accounts, mobile wallets
will become strong players in the financial ecosystem. In July 2023, Unified Payments Interface (UPI) recorded 9.96
billion transactions worth US$184.16 billion (Rs. 15.34 Lakh crore).

Source: DSP Mutual Fund, Indian Brand Equity Foundation

On 16th November 2023, the RBI raised risk weights on riskier unsecured retail loans and credit cards by banks and
Non-Bank Finance companies (NBFCs) by 25 percentage points. This tightening of underwriting norms by RBI through
higher risk weighted assets will need lenders to allocate higher capitals for such loans improving their loss absorbing
buffers and moderately dampening their growth appetite.
Majority of listed banks and NBFCs are adequately capitalized to absorb the impact, with an estimated effect of around
10-80 basis points for banks and approximately 20-450 basis points for NBFCs. Larger institutions are expected to
experience minimal impact and may even benefit over time. However, mid and smaller-sized lenders may be affected
to varying degrees on a case-by-case basis.

About the Nifty Financial Services Index

➢ Banking and Financial Services sector is thematic yet diversified with not only Banks and NBFCs including HFCs but also
life insurance, AMC, Exchanges and Depositories.
➢ The index consists of 20 stocks, with 77% allocation to banks, 16% to financial institutions (NBFCs, HFCs or holding
companies), 6% to insurance (general or life) & balance 1% to capital markets sector (AMCs or exchange & data
platforms).
➢ The road for Financial Services (BFSI) sector has been challenging yet rewarding. Annualized returns from (01-Jan-04
to 31-Oct-23) for Nifty Financial Services TRI was 17.34% vs Nifty 50 TRI’s CAGR of 13.74% and Nifty 500 TRI’s CAGR of
14.17%.

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➢ BFSI returns have been more consistent compared to broader index. 90% of the times Nifty Financial Services TRI has
delivered returns over 12% over a 7+ Year timeframe (vs 52% for Nifty 50 TRI).

Source: Indian Brand Equity Foundation, DSP Mutual Fund, MFI Explorer, NSE

Conclusion

➢ The Indian economy stands at a critical juncture of its evolution. There are expectations of rapid growth, inclusive
growth, wealth creation, trickle down of wealth, plenty of jobs, better living standards, quality infrastructure & access
to basic banking facilities.
➢ Consumer debt levels in India are significantly low compared to other emerging & developed economies. The consumer
lending space in India has a huge opportunity for the organized lenders (banks & NBFCs). Unlike in the past, the coming
round of growth will likely be driven by multiple engines as Banks/NBFCs have developed diverse product lines.
➢ The Indian banking industry will be on an upward trajectory aided by strong economic growth, rising disposable
incomes, increasing consumerism and easier access to credit. Valuations are also well placed at reasonable levels
further adding to the positives.
➢ Banking and financial services fund provides better participation in opportunities outside of banks. Thus, we
recommend part allocation to recommended BFSI funds which are well placed to capitalize on the forthcoming growth
with an investment horizon of 3 to 5 years.

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 Funds Recommended

Corpus Returns (%)

Scheme Name Launch Date
(Rs. in crs.) 3M 6M 1Yr 2Yrs 3Yrs 5Yrs 7Yrs 10Yrs YTD
Nippon India Banking &
4,588 26-May-03 5.0 12.0 18.9 13.5 24.5 12.9 14.2 16.8 14.5
Financial Services Fund
Sundaram Financial Services
876 10-Jun-08 7.8 16.3 23.0 14.5 20.0 16.9 15.1 16.8 20.4
Opportunities Fund
Tata Banking And Financial
1,672 28-Dec-15 2.4 12.4 17.5 10.8 16.4 15.0 15.7 -- 13.0
Services Fund
Category Average 4.1 9.3 13.9 9.5 16.8 12.9 13.4 15.6 11.4
Nifty Financial Services TRI -- -- 0.2 1.4 4.5 3.6 12.2 12.8 15.6 16.8 4.3
Nifty 50 TRI -- -- 2.2 9.4 10.1 6.8 16.8 14.6 15.4 14.0 10.4
Nifty 500 TRI -- -- 4.8 15.0 15.1 8.5 19.9 15.8 16.0 15.6 15.1
Source- ICRA MFI Explorer. Returns as on 21st November 2023. Returns < 1 year are absolute returns and >1 year are annualized returns.

Strategy Of Recommended Funds

➢ Nippon India Banking and Financial Services Fund Top 10 Holdings

Nippon Indian Banking and Financial Services fund, Company Name Weight (%)
managed by Mr. Vinay Sharma, employs blend philosophy, HDFC Bank Ltd. 16.5
by investing in diversified sub segments like Private Banks, ICICI Bank Ltd. 12.8
PSUs, NBFCs, Housing Finance Co’s, Broking houses; Axis Bank Ltd. 9.5
collectively accounting for 65.9% in Banking sector, 16.9% State Bank Of India 8.2
in financial service sector, 9.2% in insurance sector and IndusInd Bank Ltd. 4.3
5.9% in capital market sector. SBI Life Insurance Company Ltd. 4.3
SBI Cards & Payment Services Pvt. Ltd. 3.8
The investment decisions are taken based on research
The Federal Bank Ltd. 3.6
reports, market intelligence, analysis of macro and micro
Max Financial Services Ltd. 3.2
economic indicators, market trends etc. It generates
LIC Housing Finance Ltd. 3.0
superior alpha through active fund management and takes
Source- MFI Explorer. Data as on 31st October 2023
tactical allocation calls focusing on lower risk through
diversification while retaining the alpha creation potential.

➢ Tata Banking and Financial Services Fund Top 10 Holdings

Tata Banking and Financial Services fund invests in Company Name Weight (%)
companies with a long term buy and hold approach while HDFC Bank Ltd. 21.5
ICICI Bank Ltd. 8.8
staying true to the label. The portfolio selects businesses
Axis Bank Ltd. 7.5
after rigorous fundamental research which includes
State Bank Of India 5.4
parameters like management competitiveness, business
Kotak Mahindra Bank Ltd. 5.0
competitiveness, corporate governance, growth prospects, PNB Housing Finance Ltd. 4.1
past track record etc. Karur Vysya Bank Ltd. 2.8
The portfolio has a PB of 2.8x vs benchmark PB of 3x SBI Cards & Payment Services Pvt. Ltd. 2.7
indicating the fund’s focus on margin of safety. Guided by Indusind Bank Ltd. 2.5
Mr. Amey Sathe’s 15+ years of experience, the fund is well RBL Bank Ltd. 2.2
positioned to thrive as the sector undergoes a cyclical Source- MFI Explorer. Data as on 31st October 2023
recovery.

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➢ Sundaram Financial Services Opportunities Fund Top 10 Holdings
Company Name Weight (%)
Sundaram Financial Services Opportunities fund uses
HDFC Bank Ltd. 21.1
growth-oriented strategy while having a flexible active
ICICI Bank Ltd. 17.9
management approach to optimize returns. The fund takes Axis Bank Ltd. 7.0
concentrated exposure while emphasizing on stock State Bank Of India 6.9
selection and investing across market capitalization. Power Finance Corporation Ltd. 4.5
The fund is well diversified, with 62% allocation in large cap, Cholamandalam Financial Holdings Ltd. 4.0
9% in mid cap, 25% in small cap. It has allocated 61.6% in Equitas Small Finance Bank Ltd. 3.5
banking sector, 23.5% in finance sector, 6.8% in capital Multi Commodity Exchange of India Ltd. 3.5
markets and 3.3% in insurance sector. Ujjivan Financial Services Ltd. 3.2
Canfin Homes Ltd. 3.1
Source- MFI Explorer. Data as on 31st October 2023

➢ DSP Banking & Financial Services Fund (NFO) NFO Details

Fund Name DSP Banking & Financial Services Fund
DSP Banking & Financial Services fund’s strategy prioritizes
NFO Period 20th Nov 2023 to 4th Dec 2023
business fundamentals over market outlook. The fund will
Fund Manager Mr. Dhaval Gada (PGDM- Finance)
maintain a concentrated portfolio of 20 stocks with a Benchmark Nifty Financial Services TRI
bottom-up stock selection approach.
It will maintain a high active share as compared to
benchmark and tactically invest 40-45% in banks, 35% in
NBFCs and remaining into other financial sectors. The fund
will be managed by seasoned Fund Manager Mr. Dhaval
Gada, who has specialization in the banking & financial
sector.

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