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Changing FII holdings in Indian Banks

Banking has been one of the favorite sectors of institutional investors. Over the last few years, Indian banking stocks have been attracting attention of FIIs due to major reforms in the sector (particularly the enactment of the SARFAESI Act in 2002).

Keynote Capitals analysed the stock price performance of banking stocks vis-a-vis FII outflows during the recent bear phase (period from January 10, 2008 to October 29, 2008). We also considered changes in banks’ shareholding patterns between December 31, 2007 and September 30, 2008. The results of Keynote Capitals analysis are presented below.

Summary Conclusions

1. Performance of the Sector vis-a-vis the Sensex
Banking stocks have marginally outperformed the Sensex during the period under consideration. The aggregate market cap of PSU banks and private banks declined by 55.3% vis-a-vis the decline of 56.1% in the Sensex between January 10, 2008 and October 29, 2008.

2. Underperformance led by private sector banks
Private sector banks led the drop with a decline of 60.5% in market cap, while PSU banks saw a decline of 49.2%. We believe the erosion in the market cap of private sector banks is attributable mainly to FII-led selling.

3. Changes in value of FII holdings
Total market value of FII holdings has eroded by 64.6% in case of private sector banks and by 61.1% overall.

4. Underperforming private sector banks
In the private banks space, stocks which saw a major sell off from FIIs are Axis Bank, ICICI Bank, Indusind Bank, etc.

5. Underperforming public sector banks
In the public sector banks space, IDBI Bank, Syndicate Bank and Central Bank saw a major sell off from FIIs.

Impending liberalization, a trigger

In the second phase of reforms beginning April 2009, the RBI will consider allowing acquisitions of private sector banks in India, by foreign banks.