With the recent market rally lifting the Nifty50 to new highs, Indian equities are no longer cheap. The bellwether index now trades at a price-earnings multiple of over 23 times trailing earnings, well above the long-term average of 18 times. While there are not too many pockets of value left in this market, banking stocks, particularly private banks, offer one such opportunity. The Nippon India ETF Bank Bees, which is the most actively-traded exchange traded fund (ETF) mirroring the Bank Nifty, offers a good vehicle to play this opportunity, for investors with a high risk appetite. However, as the markets seem to be entering a corrective phase with upcoming elections and rising global risks, investors should buy this ETF in phases, spreading their investments over the next six months.


Nippon India Nifty Bank Bees is an ETF that mirrors the Nifty Bank Index. This is a concentrated index with exposures to the largest banks in India. As of end-March 2024, the portfolio featured just 12 stocks, with a 93 per cent weight in large-caps.  The index features a very heavy weight in HDFC Bank (28.9 per cent) and ICICI Bank (23.7 per cent), with Axis Bank, SBI, Kotak Bank and IndusInd Bank making up the rest of the top five holdings. Private sector banks make up 85.5 per cent of the portfolio, while PSU banks (SBI, Bank of Baroda and PNB) make up the rest.

Why buy

Underperforming the market: Usually, banking stocks in India lead from the front during bull markets. But the bull market over the last five years has been the exception, with the Bank Nifty sharply lagging the markets. The five-year returns of Nippon Bank Bees has been at 10.5 per cent against the CAGR (Compounded Annual Growth Rates) of 15.6 per cent on the Nifty50. This is despite domestic banks demonstrating a spell of very strong financials, with double-digit credit growth, decadal-low non-performing assets and capital adequacy ratios that are well above regulatory norms. Within the banking space, private banks stand out for their stronger balance sheets and better underwriting skills compared to PSU banks. In the last five years, the earnings of the Bank Nifty constituents have shot up over sixfold from ₹474 to ₹2,975, while the Nifty50 earnings have risen from about ₹400 to ₹975. Bank Nifty earnings have expanded at a 44 per cent CAGR, compared to the Nifty50 earnings CAGR of 19.5 per cent in the same period.

Reasonable valuations: Despite earnings growing at a robust clip, banking stocks have not enjoyed the same degree of rerating as shares in other sectors. This has led to the Bank Nifty’s valuation ratios remaining reasonable in an over-heated market. While the Nifty50 currently trades at a price-earnings ratio of 23.3 times on a trailing basis, the Bank Nifty trades at 16.9 times. The price to book value ratio of the Bank Nifty at about 2.7 times is at a discount to the Nifty50’s 4 times. Given that the earnings momentum is expected to sustain, the Bank Nifty’s valuations on a one-year forward basis are also quite moderate, with the PE multiple at 14.5 times and the price to Book Value ratio at 2.3 times. Given that Indian banks usually transmit rate cuts to depositors more quickly than they do to borrowers, the peaking out of domestic interest rates is likely to work in favour of bank profitability in the coming year. Strangely enough, sector leaders in banking – HDFC Bank, SBI and ICICI Bank – which make up a near 62 per cent weight in the Bank Nifty, currently trade at a very reasonable valuations, at a discount to smaller peers in the sector. This adds to the attractiveness of the Bank Nifty basket at this juncture.   

Large index weight: Banking stocks make up an over 30 per cent weight in the Nifty50 and account for a significant weight in India’s large-cap stock universe. For India to sustain a 7 per cent plus growth in the coming years and for the private capex cycle to take off, participation from the banking sector is essential. Therefore, stocks of the leading banks that make up the Bank Bees are likely to attract an automatic share of the passive flows into Indian stocks from global investors.


Investments in the Bank Nifty are only suitable for investors with a stomach for high volatility. It is among the most volatile sectoral indices in India, with actively-traded derivative contracts adding to its wild swings. A rolling return analysis of the Nippon India Bank Bees, since 2005, show high variability between its good and bad years. ETF units in the stock market tend to move into a premium over the NAV at times. Investors need to track entry and exit prices carefully to avoid overpaying for the units.