Nifty Bank vs Nifty IT: Bank stocks outdo IT shares during three Nifty peaks; trend unlikely to reverse

Nifty Bank recorded gains of 11 per cent during the three recent Nifty peaks -- October 2021, December 2022 and June 2023, against a 21 per cent drop in Nifty IT during the same period. If one goes by Motilal Oswal Securities, valuations for the banking sector are reasonable in the context of broader market and that banking stocks repeating their outperformance over IT shares appears quite probable in Calendar 2023.

"Nifty Bank has been down 1 per cent from its May high, whereas Nifty IT has been down 27 per cent from its January high. Hence, we note that Nifty Bank has outperformed the Nifty IT in all the scenarios of benchmark peaks over the last 21 months," Motilal Oswal Securities said.

Despite a sharp fall in IT sector stocks, they still command valuations that are at a premium to that of banks. The wide divergence between the two main sectoral indices that one is used to since a decade has not played out in 2023 so far, Motilal Oswal said, adding that the outperformance of Nifty IT versus Nifty Bank has reversed since March.

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"Given the wide-ranging concerns on the near-term IT demand, as highlighted by our IT team in their recent reports, we expect the trajectory for Nifty IT to remain subdued going ahead. Meanwhile the banking sector continues to report solid earnings performance with return on equity, asset quality and credit costs in fine fettle. We expect a healthy 20 per cent earnings CAGR for banks over FY23-25. Valuations for the banking sector are also quite reasonable in the context of broader markets. Thus, banks repeating the outperformance over IT appears quite probable in 2023, in our view," it said.

Nifty Bank and Nifty IT indices have seen a strong resurgence from Covid lows in March 2020, with Nifty Bank and Nifty IT surging 160 per cent each. But while a strong focus on technology spends globally fuelled the IT sector rally in 2020 and 2021, a strong economic recovery in India led the healthy revival of Indian banking system in 2021 and 2022.

In FY23, earnings for Nifty Bank constituents remained strong with 38 per cent YoY growth, whereas growth for IT constituents moderated to 7 per cent YoY. The Nifty Bank and Nifty IT indices grew 21 per cent and declined 26 per cent in 2022, respectively. The strong earnings momentum in domestic banks was driven by healthy loan growth, stable margins, and asset quality improvements with a sharp revival in PSBs profits in the second half of the decade that continued in FY23 as well, Motilal Oswal said.

"Whereas, earnings performance of IT companies remained decent during the first half of the decade but moderated marginally in the second half.  IT companies’ earnings were a mixed bag in FY23 with tier-1 firms delivering muted revenue growth and modest margins and underperforming the tier-2 companies notably," Motilal said.

Bank and IT stocks together account for about 40 per cent of Nifty weight but in the last three years IT's weight in the NSE barometer has fallen to mere 13 per cent from 16.3 per cent in December 2020.

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