You are launching BOI Banking and Financial Services NFO at a time when markets are volatile and foreign investors are net sellers. How do you interpret 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 market volatility, so we don’t see that as a concern, so to speak.
Investments should always be driven by fundamentals and how things are expected to look in the future. We believe that BFSI as a space will see a quantum leap from here on out as the economy expands as this is a sector that has a very high correlation with economic growth. Also, the longevity of companies in this space is high.That leads us to believe that BFSI as a company should be on a strong growth trajectory as the economy moves from a $4 trillion level to a $7-8 trillion economy. If you look at the recent times, NPAs have come down in the banking sector as deposit growth and lending have increased, and other businesses like insurance and capital markets are also doing well.
Valuations are pretty decent right now. So you have valuation comfort, a good runway for growth and visibility of existence over a longer period of time. These are much more important factors than short-term volatility or periodic FII selling. These things can also turn around very quickly. Our decision to launch the fund is therefore fundamentally driven by valuation comfort, the relevance of the sector and the growth rate it can deliver in the future.
From a timing perspective, what makes the current stage 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 five to seven years, the Nifty Bank has been trading at around 2.7 times price-to-book value. Currently, valuations are around 2.4, so there is a discount compared to the historical average.
If you look at the Nifty 50 over the same period, its price-to-book ratio is around 3, while the banking sector, which constitutes around 35% of the index, is trading at around 2.4. So there is clearly a valuation discount. Fundamentally, banks’ ROEs have improved and NPA levels are at lower levels. In terms of balance sheet, the banks are strong. Valuations are cheaper, and this cheap valuation is not necessarily due to long-term concerns, but largely to recent rate cuts, with assets being repriced faster than liabilities, leading to some interim NIM pressure, which tends to diminish over time. So we think the current valuation discount to the long-term average is temporary and provides a good starting point for a new investor. That is how we currently position our fund.
How much of your investment thesis is driven by valuation versus visibility of earnings over the next 12 to 24 months?
I think it’s driven by both equally. There is certainly valuation comfort, as I explained earlier, in terms of the historical price-to-book levels the sector is trading at today.The correlation between nominal GDP growth and growth in the size of the banking sector is quite high. Since the economy is growing at a nominal GDP growth rate of around 10-11%, the banking sector is likely to post a similar or even better growth rate. If you look at the last two decades, nominal GDP has grown around 10x, while the BFSI space has grown around 50x, indicating a higher delta.
So if we go from a $4 trillion economy to, say, $7, $8 or even $10 trillion in the future, the banking sector will become proportionately larger. So it’s a combination of valuation comfort and earnings visibility.
With earnings season approaching, what are the key signals you are looking for from banks, NBFCs and insurers to validate your medium-term outlook?
As you know, we are only at the beginning of the results season. Some banks have already started delivering results, and some insurance companies have done so as well. We would like to see how credit growth develops because it is clear that NPAs are under control.
So the key factor that will determine growth is how lending progresses and how quickly institutions can grow their loan portfolio. Similar logic applies to other segments, whether insurance or capital markets.
Across the sector, we are more focused on sales or revenue growth than anything else because the other factors are quite well placed in terms of efficiency and what the sector can deliver. Sales growth is therefore something we keep a close eye on across the sector.
Within banks, where do you see the opportunities for higher alpha generation in the next two to three years: small private banks or PSU banks?
I think PSU banks are very well placed as they trade at the cheapest valuations in the banking industry. Even some of the large PSU banks are trading at much lower valuations compared to their peers, mainly because they were not as efficient.
As we see now, they become equally efficient. Now that the business model efficiency has improved and NPAs are well managed, I think the valuation gaps should start to converge. So we believe that the PSU banks might do better.
Gold loans are becoming increasingly attractive for many banks. How should investors read the growth in this segment?
When you look at borrowing compared to gold, this is one of the safest ways to borrow because the risk of recovery is low as gold typically retains its value and does not necessarily depreciate.
Another important aspect is that gold is quite easily liquid. From a banking point of view, this is a good credit segment. With the rise in gold prices and a significant amount of domestic capital being parked in gold, we see this as a positive opportunity in the Indian context.
We see no emerging risks in this segment compared to unsecured loans or other forms of personal loans. This is a better space to live in, and we rate banks that focus on this segment positively.
Since the market peak, we have seen some slowdown on the capital markets front. Do you think asset managers and brokers can excel again in 2026?
Your reference is obviously to market capitalization and how stock prices have behaved over the past year. But that’s something that happens from time to time, where markets and market caps behave differently than the underlying companies.
If you look at the businesses of most asset managers and asset managers, they have delivered decent operational performance in terms of both revenue and bottom line. Apart from some investment banking activities, which slowed down in the first part of the year due to market conditions, most others performed well.
Sometimes stock prices or markets behave differently from company fundamentals, and I think this is one of those phases. Basically, if you look at franchises related to the capital markets, the companies have done quite well.
Valuations in parts of the BFSI space are trading at a discount to long-term averages. How do you assess the pitfalls versus real opportunities?
We do not see this as a pitfall. As mentioned earlier, the main reason for the discount is the transient impact of NIM compression after rate cuts. There were also concerns about credit growth as the economy had slowed slightly around the same time last year, which was visible in the GDP figures.
Since then, the government has done a significant amount of work to support growth, and the economy is now growing well, with the most recently reported growth of around 8.2%. Against this background, we do not view the current situation as a pitfall.
NIM-related concerns should also diminish in the coming quarters. These are largely temporary issues, and the concerns we see today are not long-term.
What type 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 should be held for five years or more. Anything shorter than that tends to create volatility, and the NAV can behave very differently in the short term.
A time horizon of more than five years is therefore important. This is also a sector that suits all types of investors as Bankex and Nifty Bank are among the largest indices after the Nifty 50 and the Sensex in terms of traded value, volumes and overall market participation.
The BFSI space is not just about banks. It is a diversified industry made up of multiple companies, some of which are connected and some of which are not. These include banks, NBFCs, asset managers, asset managers, fintech, brokerage, stock exchanges, RTAs and several other segments.
It is therefore a large, well-diversified space that should be considered by all categories of investors, not just retail or a specific group. This is an industry for everyone.
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