Bank vs IT stocks: Balance now tilting in favour of lenders

NEW DELHI: In what looks like early signs of a short-term trend that may last for a couple of quarters, bank stocks have started outperforming both Nifty as well as IT stocks. While the Nifty IT index is down 4.5 per cent so far in July, Nifty Bank is up 3.6 per cent. During the same period, the headline index Nifty is up just about a per cent.

Although the long-term story of both the banking and IT sector is intact at the fundamental level, investor preference seems to be tilting in favour of bank stocks in the near term. At a sectoral level, both have high weightage in Sensex and Nifty.

Motilal Oswal's equity strategist Hemang Jani said investors in IT stocks are worried about the impact of aggressive rate hikes and the possibility of a considerable slowdown in the US economy. He fears more pain ahead for IT stocks till there is clarity about the growth cycle in terms of IT spending in the US.

TCS' Q1 results indicated margin pressure for the industry. The IT exporter’s operating margin contracted by 2.4 per cent year-on-year (YoY) to 23.1 per cent. HCL's EBIT margin for IT services was down 180 bps quarter-on-quarter (QoQ).

also warned of a slowdown in its Europe business.

Global brokerage firm Nomura, which is cautious on the India IT services sector, believes FY23 will be marked by more margin disappointment, and FY24 by revenue growth disappointment, both of which need to be factored in by consensus adequately.

In the last one week alone, both and TCS have lost around 8.7 per cent each. , and are down over 4 per cent each in a week.

Bank stocks, however, are finding favour amid higher business growth, NIM expansion amid rising interest rates and picking up of momentum in credit growth.

NIM or net interest margin is expected to grow since the yield on advances would have moved up faster than the cost of deposits due to repo rate-linked loans getting re-priced immediately.

"We expect the quarter to be strong for the banking industry as a whole and expect larger private banks to outperform. We expect the return metrics to improve driven by improving loan growth, improving NIMs and moderate credit costs," said.

In the last one month alone, the stock of is up over 9 per cent, 6.4 per cent, 3.4 per cent and 2.8 per cent.

Nilesh Shah, MD, Mutual Fund, said large banks are grabbing the bulk of the credit growth. “There is consolidation, NIMs are expanding, and NPAs are low. I think all these put together, creates a huge opportunity for the banking sector to outperform the market,” he told ETMarkets.

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