Banks, the biggest component of the Indian equity market, are now trading at a big discount to the benchmark indicesThe BSE Bankex index, which tracks the share price of the 10 top listed banks, is trading at a trailing price to earnings (P/E) multiple of 15.3X, nearly a 40 per cent discount to the BSE Sensex current P/E of 24.37X.
This is the biggest valuation gap between the two indices in at least 10 years.
Similarly, the BSE Bankex price to book ratio (P/B) of 2.22X is 40 per cent lower than the current Sensex P/B ratio of 3.61X.
After a sharp fall in the share prices of HDFC Bank and other private sector lenders in the past three days, the BFSI (banking, financial services and insurance) sector weighting in the Nifty50 has slipped to a seven-year low of 32.03 per cent, down from nearly 36.6 per cent at the end of March 2023 and 34.5 per cent at the end of December 2023.
The Nifty IT index rose by 5.14 per cent on Friday (January 12), marking its best performance in a day since July 2020, followed by another 1.9 per cent rally on Monday.
With this, the index, which tracks the share prices of India s 10 biggest information technology (IT) services companies, has increased 7.1 per cent in the past two sessions.
However, the substantial rally in the index occurred at a time when India s four largest IT companies reported their worst quarterly performance in over five years.
Even as banks and finance companies are reporting record-high earnings, their weighting in the benchmark National Stock Exchange Nifty50 Index has seen a downward trajectory. Investors expect a stronger performance from other sectors in the new year.
Currently, banking, financial services and insurance (BFSI) companies collectively hold a weighting of 34.5 per cent, down from 36.7 per cent at the end of December 2022 and a record high of 40.6 per cent at the end of December 2019.
This represents the sector s lowest weighting in the index since December 2021 when it stood at 33.7 per cent.
RBI has noticed investments by regulated institutions (REs including Banks, NBFCs, and FIs) in AIFs, who have also funded companies that have taken loans from RE.