PSU banks trading below book value despite healthy ROE: Krishna Sanghavi

Time of India

21 hours ago

Despite healthy return ratios and minimal asset quality issues, several PSU
banks
are trading below book value, according to
Krishna Sanghavi
, CIO-Equity at Mahindra Manulife. This
valuation
anomaly comes at a time when the fund house is launching a dedicated
BFSI
sectoral fund, betting on India's demographic dividend and the ongoing financialization of savings in a formal economy.
In this conversation, Sanghavi explains why BFSI offers both cyclical rebound potential in lending and secular growth in non-lending businesses, while discussing how the sector's composition has evolved dramatically—with banks' share of BFSI market cap shrinking from 85% to 57% over two decades, creating opportunities across insurance, AMCs, NBFCs, and capital market intermediaries.
Edited excerpts from an interview:
What's the core thesis behind launching a sectoral fund focused on BFSI at this market juncture? Are you betting on a cyclical rebound or a structural re-rating?
BFSI is a core play on India's demographics, rising per capita income amidst the financialization of savings in a formal economy. Overall, we expect the penetration of different financial products to rise. More Indians are likely to enter higher income strata and can contribute to BFSI sectors' growth either as a saver or borrower (lending), investor (asset management or capital market or life insurance) or seeking protection (life insurance or general insurance). We see it as a combination of cyclical rebound (lending) in line with the economy and secular growth (non-lending businesses).
Additionally, there are opportunities for earnings growth and valuations within the various micro-segments in BFSI. Banks, both private and PSUs, have healthy balance sheets and return ratios with minimal asset quality issues. Moreover, the
Nifty Financial Services
index underperformed the Nifty 500 index in four out of the last five calendar years. Valuations are reasonable and earnings outlook is also improving. The Nifty Financial Services index has already shown signs of revival, outperforming the broader Nifty 500 index by nearly 9.8% in the January to June 25 period. While liquidity has improved, we are yet to see improvement in deposit and credit growth, which could play out as the year progresses, supporting our positive views on the overall BFSI sector.
Expect credit quality to remain good and steady growth to help BFSI maintain broad participation in the profit pool.
BFSI is already one-third of India's market cap and profit pool. What's the incremental opportunity you see, and how differentiated can this fund be from existing diversified funds?
Within BFSI, companies in sub-sectors such as lending, asset management, and wealth fund will thus be a standalone play on the BFSI theme, compared to our diversified funds where BFSI is only a part of the overall portfolio sectoral continuity of earnings from fund will thus be a standalone play on the BFSI theme compared to our diversified funds, where BFSI is only a part of the overall portfolio sectoral portfolio.
While banking has been the traditional heavyweight, how are you looking at the broader spectrum—insurance, AMCs, fintechs, NBFCs? Which segments excite you the most today?
As income levels rise, customers start shifting from savers to either borrowers or investors. This creates wider opportunities for those businesses. When we examine history, in March 2005, Banks constituted nearly 85% of the BFSI market capitalisation, now make up only 57% of the BFSI market capitalisation, while 2—Various from NBFCs and the remaining 20% from segment BFSI financial services companies has continued to rise with their strong earnings growth and news has kept on rising with their strong earnings growth and also newer listings. Each of these financial services segments brings in its own set of opportunities and challenges. Insurance companies have seen healthy growth, driven by rising penetration. Asset managers have seen rapid AUM growth in the last few years, thanks to rising incomes & shift towards investing, partly helped by strong market returns. On the fintech side, there have only been a couple of listings till now and a few others are expected to get listed soon. We believe these segments offer a reasonable growth opportunity.
With valuations in private banks and NBFCs at or below long-term averages, do you see this as a compelling entry point or is it more about selective positioning?
Yes, equity portfolio construct would always be about selective positioning based on stock specific criteria like growth, management and valuations. At times this gets impacted due to distortions of ownership or inclusion/exclusion in ETFs. Also, it is part of the investing cycles that at any point, some companies trade at higher or lower than long term average. Overall, we see a healthy environment with a supportive monetary policy on both lower rates as well as higher liquidity and this can help few lenders based on their asset liability mix.
How do you perceive the growth opportunity in PSU bank stocks?
The PSU banks have gone through a healthy consolidation (mergers), governance reforms & balance sheet improvement. The balance sheet has strengthened with higher capital adequacy, and the narrative on PSU stocks has improved due to diversification into retail lending and recoveries from corporate loans. Operationally, the digital rollout is helping and so is control over total employees. Higher capital would help them grow lending when the corporate capex cycle picks up. From a valuation perspective, quite a few PSU banks are trading below book value despite healthy ROA &
ROE
in FY25.
Capital market intermediaries have become significant in BFSI's narrative and an investor favourite as well. Do you see them as consistent compounders?
Capital market players have a good growth potential as India moves from being a nation of savers to a nation of investors. Rising per capita income as well as younger demography creates new customer segments who are looking at risk-return trade-offs on their investments. One advantage for these businesses is they don't require much capital for growth and hence a good execution led by digital distribution can help them grow sustainably at higher rates. The BFSI universe includes quite a few capital market intermediaries and we expect more investible opportunities from future listings. However, some of these businesses are cyclical and hence a focus on earning sustainability and valuations is a must.
In between the two ends of banks and NBFCs, the tilt has largely been in favour of the latter in a rate cut cycle. But given the valuations for both, which one would you be more biased towards?
The fact that banks may face margin pressure in a rate cut cycle and NBFCs may benefit is largely known. So, NBFCs have done well in the last year and now valuations for few NBFCs are higher relative to banks. Based on the investment timeframe being short or medium term, the rate cut cycle would start supporting the cost of funds for banks with a time-lag based on their liability franchise, maturity structure and rate cut on savings deposits. The CRR cut and easy liquidity too would help.
India's insurance sector remains underpenetrated despite a decade of liberalization. What's the investment case for life vs general insurance at this stage?
The outlook for the life insurance segment looks healthy at the moment given these companies faced VNB margin pressure in FY25 due to higher salience of ULIP sales in their mix. The product mix can be more balanced this year, aiding the margin growth. The general insurance segment is seeing slower growth on the motor segment while health insurance segment growth is strong though not very profitable. With the upcoming regulatory norms on expense management, the profitability of the general insurance sector could show improvement as insurers adhere to expense and commission caps. From the investor side, expected IFRS implementation in the next 2 years will help reduce the gap between accounting profits and VNB profits. Another regulatory support is the expected reduction in GST rate that can make insurance products more affordable. So, both Life & General insurance makes a good investment case from a longer term.