Is banks' earnings dominance in Nifty50 fading? A deep dive

Bank stocks: Banks, Elara Capital said, saw softer earnings in Q4 as credit growth remained subdued, even as deposit mobilization improved.

Q4 results review: India Inc exited the previous financial year 2024-25 (FY25) on a muted note with earnings growth restricted to low single digit for the entire year. What surprised stock market analysts, however, is the sharp divergence in the financial performance of various sectors in the last quarter of the year, i.e. Q4FY25, which revealed the fading dominance of banks in the earnings growth – historically, a market leader.

 

According to Elara Capital, the earnings report card of the March 2025 quarter shows that markets are in a "transition mode". While two-wheeler makers within the automobile sector saw volume growth of 6 per cent, original equipment manufacturers (OEMs) struggled during the quarter. 

 

The earnings for the Oil & Gas sector declined due to weaker results from upstream public sector units (PSU), city gas distribution (CGD) operators, and refiners, partially offset by margin recovery in oil marketing companies (OMC), while FMCG companies outperformed in rural markets (8.4 per cent volume growth) than in urban markets (2.6 per cent growth).

 

Banks, it said, saw softer earnings in Q4 as credit growth remained subdued, even as deposit mobilisation improved.

 

A similar analysis of its universe by Motilal Oswal Financial Services showed that the aggregate earnings grew 10 per cent year-on-year (Y-o-Y) in Q4FY25, powered by Metals (profit up 45 per cent Y-o-Y), OMCs (14 per cent), Healthcare (17 per cent), Capital Goods (14 per cent), and Consumer Durables (37 per cent).

 

In contrast, aggregate earnings growth was hit by Oil & Gas (ex OMCs), and private banks (down 6 per cent Y-o-Y).

 

Post pandemic growth in the bank sector

In the post pandemic world, banks led the earnings recovery of India Inc boosted by pent-up credit demand.

 

The net profit of the banking sector zoomed from ₹57,100 crore in FY20 to ₹2,28,300 crore by FY25, a 4x expansion, driven by benign credit cost, robust loan growth, margin expansion, and a clean-up of legacy balance sheet risks. 

 

"During this five-year period, banks accounted for 37.2 per cent of Nifty 50’s incremental earnings, contributing ₹1.7 trillion to ₹4.6 trillion jump in total profit," the brokerage said.

 

Notably, the concentration of the banking sector's profit in the cumulative earnings of the Nifty 50 index was also at its highest level during this period. The sector’s share in the benchmark's cumulative earnings increased from 17 per cent in FY20 to a peak of 29 per cent in both FY24 and FY25.

 

This trend, as per Elara Capital, is about to pivot on the downside.

 

Banks: End of dominance?

According to the brokerage, the banking system’s credit growth could likely moderate to 12.3 per cent in FY26, down from peak growth of 16.3 per cent in FY24. Simultaneously, deposit growth remains subdued at 11.8 per cent, denting net interest margin (NIM) outlook.

 

"Going ahead, while banks’ PAT is still expected to grow modestly to ₹2.34 trillion, up 2.6 per cent year-on-year (Y-o-Y), their incremental contribution to Nifty 50 earnings could drop sharply to a mere 5.8 per cent, down from 36.3 per cent in FY25. On a differential basis (PAT share minus incremental contribution), banks flip into a -20.4 per cent drag, a striking reversal from their leadership status," Elara Capital said.

 

For the current financial year (FY26), Elara Capital expects diversified, energy, and metals to emerge as dominant contributors towards Nifty earnings, where the growth is seen at 60 per cent of incremental Nifty 50 PAT.

 

Strategy: Should you buy or sell bank stocks?

Nonetheless, the Nifty Bank index trades at 2.0x price-to-book (P/B) multiple, below its long-term average of 2.3x.

 

Elara Capital is bullish on ICICI Bank and HDFC Bank on the back of superior execution and strong growth outlook. It prefers SBI with the PSU Bank basket.

 

MOFSL, too, expects Financials, as a whole, to see 11 per cent earnings growth in FY26 and remains 'Overweight' on the BFSI sector.