You’re launching BOI Banking and Financial Services NFO at a time when markets are volatile and foreign investors have been net sellers. How do you read the current market setup, and why is this still a good entry point for a sector-focused fund?
Market volatility is a regular phenomenon. You can’t time investments based on short-term volatility in the market, so we don’t see that as a concern, so to say.
Investments always have to be driven by fundamentals and by how things are expected to shape up in the future. We believe that BFSI as a space is going to see a quantum jump from here as the economy becomes bigger, because this is one sector that has a very high correlation with economic growth. Also, the longevity of businesses in this space is high.
That makes us believe that BFSI as a business should have a strong growth trajectory as the economy moves from a $4 trillion level to a $7–8 trillion economy. With improved fundamentals, if you look at recent times, NPAs in the banking space have come down, deposit growth and lending growth have started picking up, and other businesses like insurance and capital markets are also doing well.
Valuations currently are quite decent. So, you have valuation comfort, a good runway for growth, and visibility of existence over a longer period. These are far more important factors than near-term volatility or intermittent FII selling. These things can also reverse very quickly. Our decision to launch the fund is therefore fundamentally driven based on valuation comfort, the relevance of the sector, and the growth rate it can offer in the future.
From a timing perspective, what makes the current phase in the banking and financial services cycle attractive for launching a new fund?
If we look at it from a valuation perspective over the last 5–7 years, the Nifty Bank has been trading at roughly 2.7 times price-to-book. Currently, valuations are around 2.4, so there is a discount to historical average.
If you look at the Nifty 50 in the same period, its price-to-book is around 3, while the banking sector, which constitutes roughly a 35% share of the index, is trading at about 2.4. So clearly, there is a valuation discount.Fundamentally, ROEs across banks have improved, and NPA levels are at lower levels. Balance sheet–wise, banks are strong. Valuations are cheaper, and this valuation cheapness is not due to any long-term concern per se, but largely because of recent rate cuts, where assets get repriced faster than liabilities, leading to some interim NIM pressure, which typically eases off over time. So, we think the current valuation discount from its long-term average, is temporary in nature and offers a good entry point for a new investor. That is how we are positioning our fund right now.
How much of your investment thesis is driven by valuation versus earnings visibility over the next 12 to 24 months?
I think it’s driven by both equally. Valuation comfort is certainly there, as I explained earlier, in terms of the historical price-to-book levels at which the sector is trading today.
The correlation between nominal GDP growth and the growth in the size of the banking industry is quite high. As the economy grows at around 10–11% nominal GDP growth, the banking industry is likely to demonstrate a similar, or a better, growth rate. If you look at the last 20 years, nominal GDP has grown by about 10x, whereas the BFSI space has grown by around 50x, indicating a higher delta.
So, if we move from a $4 trillion economy to, say, $7, $8, or even $10 trillion in future, the banking industry will become proportionately larger. It is therefore a combination of valuation comfort and earnings visibility.
With the earnings season underway, what are the key signals you are watching for from banks, NBFCs, and insurers to validate your medium-term outlook?
As you know, we are just at the start of the earnings season. Some banks have already started delivering their results, and some insurance companies have as well. We are keener to see how lending growth shapes up, because clearly, NPAs are under control.
So, the key factor that will determine growth is how lending progresses and how quickly institutions are able to grow their loan books. Similar logic applies across other segments, whether it is insurance or the capital markets space.
Across the entire sector, we are focused more on revenue or top-line growth than anything else, because the other factors are quite well placed in terms of efficiency and what the industry can deliver. Top-line growth is therefore something we are watching closely across the sector.
Within banks, where do you see chances of higher alpha generation over the next 2–3 years—small private banks or PSU banks?
I think PSU banks are very well placed because they trade at the cheapest valuations within the banking space. Even some of the large PSU banks trade at much lower valuations compared to their peers, primarily because they were not as efficient.
As we see now, they are becoming equally efficient. With improvements in business model efficiency and NPAs being managed well, I think the valuation gaps should start converging. So,we believe that PSU banks might do better.
Gold loans are increasingly becoming an attractive opportunity for many banks. How should investors read the growth in this segment?
If you look at lending against gold, it is one of the most secure ways of lending because the risk to recovery is low, as gold typically holds its value and does not depreciate per se.
Another important aspect is that gold is quite easily liquid table. From a banking point of view, this makes it a good lending segment. With the increase in gold prices and a significant amount of domestic capital being parked in gold, we view this as a positive opportunity in the Indian context.
We do not see any emerging risks in this segment when compared to unsecured lending or other forms of personal lending. This is a better space to be in, and banks that are focusing on this segment are viewed positively by us.
We have seen some slowdown in the capital markets theme since the market peaked. Do you think wealth managers and brokers can outshine again in 2026?
Your reference is obviously to market capitalisation and how share prices have behaved over the last year. But that is something that tends to happen from time to time, where markets and market caps behave differently from the underlying businesses.
If you look at the businesses of most wealth managers and asset managers, they have delivered decent operating performance in terms of both top-line and bottom-line growth. Apart from some investment banking businesses, which saw a slowdown in the initial part of the year due to market conditions, most others performed well.
Sometimes, share prices or markets behave differently from business fundamentals, and I think this is one of those phases. Fundamentally, if you look at capital market–related franchises, the businesses have done quite well.
Valuations in parts of the BFSI space are trading at a discount to long-term averages. How do you assess value traps versus genuine opportunities?
We do not see this as a value trap. As mentioned earlier, the primary reason for the discount has been the transient impact of NIM compression following rate cuts. There were also concerns around lending growth, as the economy had slowed somewhat around the same time last year, which was visible in the GDP numbers.
Since then, a significant amount of work has been done by the government to support growth, and the economy is now growing well, with the most recent reported growth at around 8.2%. With this backdrop, we do not view the current situation as a value trap.
NIM-related concerns should also ease in the coming quarters. These are largely transient issues, and the concerns we are seeing today are not long-term in nature.
What kind of investor profile and time horizon is best suited for this fund, especially given the cyclical nature of financial stocks?
Whether cyclical or non-cyclical, equity investments need to be held for five years or longer. Anything shorter than that tends to create volatility, and the NAV can behave quite differently in the short term.
So, a five-year-plus time horizon is important. This is also a sector suited to all sets of investors because, after the Nifty 50 and the Sensex, Bankex and Nifty Bank are among the largest indices in terms of value traded, volumes, and overall market participation.
Within the BFSI space, it is not just about banks. It is a diversified sector comprising multiple businesses, some of which are correlated and some of which are not. These include banks, NBFCs, asset managers, wealth managers, fintech, broking, exchanges, RTAs, and several other segments.
It is therefore a large, well-diversified space and should be considered by all categories of investors, not just retail or any specific group. This is a sector for everyone.