Nifty Bank hits fresh record highs in July; ICICI Bank, SBI could see 18-20% upside in 12 months

The Nify Bank hit a fresh record high earlier in July tracking momentum in equity markets as well as banking stocks.

Despite the strong performances of both Nifty Bank and IT indices over the past decade, the combined annual returns have shown a huge divergence.

The divergence ranged between ~10% and ~60% per year, highlighting the obvious but decisive role of getting the sector call right at the beginning of a CY. Both sectors have very natural and pertinent macro linkages.

Banking being a microcosm of the broader economy cannot remain immune to the prevailing global and domestic macro environment.

Technology, meanwhile, derives more than two-thirds of its revenue from the US and Europe and has direct linkages with the trends prevailing in the global economy.

For example, since the onset of Covid-19, the IT sector has – both in 2020 and 2021 – benefitted from the tailwinds of rising technology spending globally as digitization assumed mission-critical importance in an era of physical and social distancing.Meanwhile, the banking sector bore the brunt of weaker economic growth and concerns around deterioration in asset quality led by persistent lockdowns in 2020 and 2021.

The aggregate profits of Nifty Bank constituents reported ~14% CAGR over FY13-23 reaching Rs1.9t in FY23; whereas that of Nifty IT constituents posted 11% CAGR and reached Rs1.1t in FY23.

We expect profits of Nifty Bank/Nifty IT constituents to report ~20%/14% CAGR, respectively, during FY23-25. The market cap contributions of Nifty Bank and Nifty IT constituents stood at ~12% and ~10% of Nifty-500, respectively, as of CY23YTD.

The market cap ratio between Nifty Bank and Nifty IT indices reached 1.2x in CY22 from the lows of 0.7x in CY21. The ratio remained at 1.2x in CY23YTD as well.

Nifty-50 reached its all-time high in Jun’23 post-achieving its last peak in Dec’22. Comparing the indices’ performances (between Dec’22 and Jun’23), the Nifty Bank has outperformed by ~2% whereas Nifty IT has underperformed by ~8% during the same period.

The wide divergence between the two main sectoral indices that one is used to for a decade has not played out so far in CY23. This is because the outperformance of IT vs. Bank has reversed post-Mar’23.

Given the wide-ranging concerns on the near-term IT demand, we expect the trajectory for Nifty IT to remain subdued going ahead.

Meanwhile, the Banking sector continues to report solid earnings performance with RoE, asset quality, and credit costs in fine fettle.

We expect a healthy 20% 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.

ICICI Bank: Buy| LTP Rs 959| Target Rs 1150| Upside 20%| Time 1 year

S&P Global upgraded the credit rating of ICICI Bank to ‘BBB’ from ‘BBB-‘. It expects the bank to maintain its strong market position in the Indian banking sector. ICICI Bank is well positioned to deliver steady earnings, supported by pristine asset quality & strong momentum in business growth.

The stable mix of a high-yielding portfolio (Retail/Business Banking) and a low-cost liability franchise is driving steady NII growth, resulting in margin expansion to 4.9%. We estimate RoA/RoE of 2.2%/17.6% in FY25.

SBI: Buy| LTP Rs 592| Target Rs 700| Upside 18%| Time 1 year

The bank is steadily strengthening its balance sheet and consistently delivering healthy RoE while maintaining its leadership position. It continues to focus on building a superior loan book, as evident in a steady decline in stressed assets, improving PCR, and robust loan growth (17% in FY23). We expect 15% earnings CAGR over FY23-25E and RoA/RoE of ~1.0%/18% during the same period.

(The author is Head – Retail Research, Motilal Oswal Financial Services Limited)

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