The Bank Nifty is currently trading at a 43.5% discount to the Nifty 50, representing one of the widest gaps since index valuation data became available in 2015. According to reports from Business Standard, the banking index is trading at a price-to-book ratio of 1.83, significantly lower than the Nifty 50's 3.25 ratio. This valuation discount has persisted despite the banking sector's strong performance as a key driver of corporate earnings growth in recent years.
Over the past 12 months, the Bank Nifty's underlying earnings per share (EPS) has grown by 4%, rising from ₹3,810 at the end of May last year to ₹3,960 on Monday. As reported by Business Standard, the Nifty 50's underlying trailing EPS grew by 4.3% from ₹1,109 to ₹1,156.5 during the same period. However, the banking sector has demonstrated superior long-term performance, with the Bank Nifty's trailing EPS rising 172% over the last five years, compared to the Nifty 50's 117% increase during the same period.
According to Dhananjay Sinha, co-head research and equity strategy at Systematix Institutional Equity, cited by Business Standard, the disconnect between bank earnings growth and valuations stems from investor concerns about sustainability. Key headwinds include rising bond yields, rupee depreciation, growing delinquencies in retail credit, and lack of gains from reduction in non-performing assets. In contrast, analysts remain more bullish about earnings growth in sectors such as automobiles, capital goods, and defence, leading to valuation de-rating of banking stocks.
The Nifty 50's price-to-book ratio has remained largely unchanged over the last decade, moving from 3.18 at the end of October 2015 to 3.24 on Wednesday. In contrast, the Bank Nifty's P/B ratio has contracted by nearly a quarter from 2.4 to 1.83 during the same period. As reported by Business Standard, the Nifty 50's trailing P/E multiple has declined just 4.5% from 21.4x to 20.45x, while the Bank Nifty's trailing P/E multiple has fallen 23% from 17.53x to 13.52x over the same decade.
Despite the valuation discount, some analysts view the current banking sector position as an investment opportunity. According to G Chokkalingam, founder & CEO of Equinomics Research & Advisory, as reported by Business Standard, most banks now have record low bad loans and credit growth continues to grow by 10-11%. The Bank Nifty has kept pace with the broader market and has recently started to outperform, with the Bank Nifty down 10.1% year-to-date compared to the Nifty 50's 9.5% decline. The banking sector maintains a 27.6% weight in the Nifty 50 as of Wednesday, indicating its continued significance in the benchmark index composition.
