Nifty Financial Services vs Nifty PSU Bank: Which sector should you pick for growth in long term?

Markets have been hitting multiple all-time highs since the last week of June, driven by continuous foreign fund inflows, improving macroeconomic data and positive global trends. Not just the benchmarks, most sectoral indices also touched their new peaks in this rally.

While Nifty Financial Services touched its new high of 20,577 in intra-day deals on Tuesday, July 4, 2023; Nifty PSU Bank is over 4 percent away from its all-time high of 4,617, hit in December 2022.

Stock market trends and earnings suggest that Nifty Financial Services has been on an upmove mainly on the back of the HDFC-HDFC Bank merger. Also, improving asset quality, recovery in margins, and stronger loan growth have helped the index reach new highs. However, after a spectacular 2022, the current calendar year has not been very good for the Nifty PSU Bank index. This is mainly due to weak global demand and monetary tightening by the central bank. Moreover, the recent Adani-Hindenburg saga raised concerns over the Adani conglomerate’s debt exposure.

Amid this backdrop and the ongoing positive market sentiment, let's analyse between Nifty PSU Bank and Nifty Financial Services (Nifty Fin), which sector has better growth opportunities in the long run.

Looking at 2023 YTD, both of these sectors have underperformed the benchmark Nifty. However, Nifty Fin is the better-performing index. The index has advanced almost 7 percent in 2023 YTD as against a 2.25 percent rise in Nifty PSU Bank. In comparison, the benchmark Nifty has gained over 7.5 percent in this period.

Nifty Fin has given positive returns in 5 of the 7 months in the calendar year 2023 so far while Nifty PSU Bank has given positive returns in 4.

Meanwhile, in the last one year, both Nifty PSU Bank and Nifty Fin have outperformed the benchmark. However, the former has emerged as a winner in this time period. The index has surged over 75 percent in the last 1 year while the Nifty Fin has added 26 percent. In comparison, the benchmark Nifty advanced 22 percent in the last 1 year.

In the long term (3 years) as well, Nifty PSU Bank has given better and multibagger returns. Nifty PSU Bank has skyrocketed 198 percent in the last 3 years while Nifty Fin has jumped 84 percent and Nifty has advanced 81 percent.

The financial service index, however, has outperformed the PSU bank index during the last five years. The financial services index gave 84 percent returns, while the PSU bank index gave 58 percent returns for the five-year period.

Constituents

In the Nifty Financial Service, among 20 constituents, 90 percent of the stocks or 18 are in the green in 2023 YTD while only 2 are in the red, whereas among the 12 constituents in the Nifty PSU Bank index, only 4 or 33 percent of the stocks are positive while 8 are negative in this period.

Chola Invest rallied the most in the fin services index, up over 61 percent this year so far, followed by PFC and REC, which jumped 58 and 42 percent, respectively. Meanwhile, Shriram Finance, ICICI Prudential, Muthoot Finance, Bajaj Finance, and HDFC Life rose between 16 and 30 percent each.

SBI and Indian Energy Exchange were the only losers in the fin services space, down 3.5 and 9.5 percent, respectively.

On the other hand, Bank of Baroda was the top performer and the only stock to give double-digit returns this year in the Nifty PSU Bank index, up over 10.5 percent, followed by Indian Bank, Bank of Maharashtra and Punjab National Bank, up between 4 and 7 percent each.

Meanwhile, Indian Overseas Bank was the top loser, down 17.6 percent in 2023 YTD, followed by Bank of India and UCO Bank, down around 8.5 percent.

Looking at the last 1 year, only 2 stocks in the Nifty Fin Services index were in the red - SBI Cards and IEX, down 0.8 percent and 22.6 percent, respectively. Meanwhile, PFC was the top gainer and the only stock giving multi-bagger returns. It soared 107 percent in 1 year, followed by Chola Invest and REC, 81 percent and 70 percent, respectively.

In Nifty PSU Bank, no stock gave negative returns in the last 1 year. Meanwhile, 4 gave multibagger returns in this time. UCO Bank surged 157 percent, Punjab & Sind Bank 130 percent, Union Bank of India 122 percent and Bank of Maharashtra 101 percent.

Which sectoral index has better long-term growth opportunities?

Suman Bannerjee, CIO, Hedonova, has chosen Nifty Fin Services between the two.

The Nifty Financial Services index has delivered annualised returns of 14.99% over the past five years, while the Nifty PSU Bank index's performance may vary. The Nifty Financial Services index, with its diversified composition, higher correlation with market indices, and positive historical returns, appears to offer better long-term investment opportunities compared to the Nifty PSU Bank index, which represents only public sector banks.

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, also likes Nifty Fin Services better from a long-term perspective.

Since the financial services index is a comprehensive index of all financial services that include banking, NBFCs, mortgages, insurance, asset management, gold loans and other specialised financial services, this index is a true reflector of the performance of the financial services sector. On the other hand, the PSU bank index reflects the performance of the narrow group of PSU banks. The PSU banks performed exceptionally in 2022 since the segment staged an excellent turnaround from the massive losses of FY18.

From a short-term perspective, PSU banks are even now attractively valued, and therefore, may perform well for a few more quarters. But from the long-term perspective, the financial services index has the potential to perform better. For the near term, the PSU banks - SBI, BoB and Canara Bank - have more room left on the upside.

Umeshkumar Mehta, CIO, SAMCO MF, prefers Nifty Fin Services over the PSU bank index.

Nifty PSU Bank index has delivered over 75% returns in the past year and has seen exceptional growth in comparison to Nifty Financial Services, which has grown around 30% in the same time period. However, this momentum in the PSU bank index was short-lived as the constituents of the financial services index are more secular; they are companies that have healthier balance sheets, cleaner books, deeper scale and penetration in rural India, lower cost of funds and higher exposure in the Indian financial system barring SBI bank. Given that an index is made of the stocks it consists of, the quality and long-term investment growth perspectives in the financial services index are better than PSU banks. Their ROE, CRAR, CASA, NPA and other liquidity ratios are also far superior to PSU banks. Due to these reasons, the Nifty Financial Services index is a better long-term investment opportunity compared to the PSU bank index.

Nirav Karkera, Head of Research at Fisdom, as well, picked Nifty Fin.

Nifty PSU Bank is highly concentrated, comprising of public sector banks only while Nifty Fin is well diversified across banks, NBFCs, insurance and asset management. While PSU banks recently staged a smart recovery on the back of healthier balance sheets and improvement in earnings, it appears that most growth prospects have been priced in fairly. While opportunities still exist selectively, the aggregate pack can be expected to witness an uptick in the shorter term but plateau over the medium term; at least relative to private counterparts and the more diversified Nifty Financial Services.

Nifty Financial Services, on the other hand, offers strong diversification into a robust financial services segment. The outlook on NBFCs, insurance companies and select asset management companies is robust. The non-banking financial services segment is expected to benefit from distinct macro and business-specific tailwinds. A combination of these culminates into a stronger outlook for Nifty Financial Services versus Nifty PSU Bank.

Shrey Jain, Founder, SAS Online, India's Deep Discount Broker, also chose the fin services index.

The Nifty PSU Bank index and the Nifty Financial Services index are prominent indices in the Indian stock market; the former comprises public sector banks, while the other represents a broader range of financial institutions. Talking about YTD performance, the Nifty Financial Services index has seen a 6.4% increase, whereas the Nifty PSU Bank index has only risen slightly over 1% during the same period.

From a technical and fundamental standpoint, Nifty Fin has surpassed its all-time high and exhibits a strong bullish trend and emerges as the preferred choice for long-term investment. On the other hand, the Nifty PSU Bank index is expected to encounter a resistance zone between 4,300 and 4,380. Given this resistance level and the current market conditions, especially in light of upcoming state and general elections, traders should closely observe the price action and make necessary adjustments to their trading strategies.

Aditya Gaggar, Director of Progressive Shares, also chose Nifty Fin for the long term.

In comparison, both the indices namely Nifty Financial Services (seen trading in the rising channel with a higher top higher bottom formation) as well as the PSU bank index (is all set to give a major consolidation breakout after 12 years) are in an uptrend. However, as per the relative performance chart of both, Nifty Financial Services has outperformed the PSU bank index by miles in the long run; but if one sees the lower time frame, the data is indicating likely outperformance by the PSU banking segment going ahead. With regard to long-term investment opportunities, Nifty Financial Services is the place to deploy the money while short-term players would look at the PSU banking index. Our preferred bets from the financial services space are Bajaj Finance, ICICI Bank, HDFC Life, ICICI Pru, PFC, REC, and Shriram Finance. From the PSU banks, we are bullish on Bank Baroda, Canara Bank, J&K Bank, PNB, and Union Bank of India.

In a contrarian view, Vinit Bolinjkar, Head of Research - Ventura Securities, has picked Nifty PSU Bank index over Nifty Fin Services.

The Nifty PSU Bank index has been trading at FY24 P/B of 0.68, whereas the Nifty Financial Services index has been trading at FY24 P/B of 2.44. India’s overall financial sector offers tremendous growth opportunities. Low credit-to-GDP ratios, increasing financialisation of household savings, anticipated CAPEX funding, the government’s thrust on financial inclusion, and the industry’s focus on higher adoption of technology augur well for the sector. We believe that India’s broader financial services sector stands to gain from an uptick in financial performance and loan books for high-quality banks and select NBFCs. Hence, undoubtedly India’s overall financial sector is all set for a massive growth trajectory. However, as a result of the huge valuation gap between the two indices, we believe Nifty PSU Bank has significantly better investment potential as compared to Nifty Financial Services and a higher probability of a re-rating.