Bank stocks vs IT shares: How these two Nifty heavyweight sectors performed in last 11 years

The divergence in the performance of banking and IT sectors was quite huge in the last 11 years and if one were to go by what Motilal Oswal Securities says, this divergence in returns is likely to continue going ahead.

Bank and IT are two heavyweight sectors that constitute 41 per cent of Nifty and 31 per cent of NSE500 weightages to date. While the weightage of banks in the NSE's 50-pack barometer has risen 820 basis points to 38 per cent between 2012 and 2022, the weightage of IT rose 260 bps to 14 per cent during the same period, a study by Motilal Oswal Securities suggested.

Divergence in returns

The Nifty Bank and NIfty IT indices have exhibited a stark divergence in yearly returns, with these two indices outperforming alternately over 2012-22. More importantly, the quantum of relative performance gap between the two sectors was over 40 per cent in six out of the 11 years and over 10 per cent in 10 out of 11 years.

This gap has expanded sharply in years of macro disruption, which has become quite frequent of late (demonetisation, GST, US-China trade-war, Covid-19, Russia-Ukraine war, rate hike cycle globally, accidents in global banking).

"In fact, in the preceding three years, i.e. 2020, 2021 and 2022 the relative returns gap between Bank & IT stood at a staggering 58 per cent, 46 per cent and 47 per cent, respectively, with IT outperforming in 2020 and 2021 while Bank outperforming in 2022. IT is so far (CY23YTD) outperforming Bank by 6 per cent," Motilal Oswal said in a note.

 

"As we look ahead, we find the valuations of both these sectors quite reasonable. That said the relative divergence between the two can continue and will be a function of: 1) how the global macro shapes up amidst the current flux and 2) the relative earnings progression for these sectors," Motilal Oswal said.

Motilal Oswal said that both the sectors have very natural and pertinent macro linkages. "Banking being a microcosm of broader economy cannot remain immune to the prevailing macro environment, both global as well as local. Technology meanwhile derives more than two-thirds of revenue from the US and Europe and has direct linkages with the trends prevailing in the global economy," it said.

The brokerage gave an example of Covid-19. Since the beginning of Covid-19, the IT sector has – both in 2020 and 2021 – benefitted from the tailwinds of rising technology spends globally as digitisation assumed mission critical importance in an era of physical and social distancing.

The banking sector bore the brunt of weaker economic growth and concerns around deterioration in asset quality led by persistent lockdowns both in 2020 and 2021, it noted.

Earnings, valuations

Earnings for Nifty Bank and Nifty IT reported a CAGR of 10 per cent and 13 per cent during 2012-22, while the indices compounded at 13 per cent and 17 per cent, respectively, over the same period.

Valuation-wise, Nifty Bank’s 12-month forward PE is near its lon-term average, whereas that of Nifty IT is trading at a 13 per cent premium to its LPA.

In the terms of P/B ratio, Nifty Bank’s 12-month forward P/B is at 7 per cent discount to its LPA, while that of Nifty IT is trading at 23 per cent premium to its LPA.

3x jump in m-cap

During 2012-22, total market cap of Nifty Bank reported a 15.9 per cent CAGR to Rs 31 lakh crore; whereas, market cap of Nifty IT grew at 16.1 per cent CAGR to Rs 27 lakh crore.

"While the market caps for Nifty Bank and Nifty IT grew at a similar pace over the last five years, the pace of growth for Nifty IT was higher than Nifty Bank in the previous five years. Further, the market cap contributions of Nifty Bank and Nifty IT narrowed to a similar range of 20 per cent to that of Nifty in CY23YTD," Motilal Oswal said.

Meanwhile, banks accounts for 26 per cent of Nifty's profit pool, 22 per cent of Nifty's market capitalisation and 24 per cent of the index weightage. IT, on the other hand, accounts for 16 per cent of profit pool, 19 per cent of market capitalisation and 18 per cent Nifty’s weight. The two indices have disproportionate influence on the underlying earnings and performance of Nifty.

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