Looking for investing in banks? Large-cap or mid-cap?

Although the banking sector has lagged behind the Indian benchmark Nifty index over the past 6 to 12 months, it is well-positioned for substantial long-term growth, driven by India's largely underbanked population.

In 2024, the Nifty Bank index has risen over 8% trailing the benchmark Nifty's almost 13% increase. Meanwhile, over the past year, the Nifty Bank index has gained over 14%, compared to the Nifty's approximate 24% rise.

Within the banking sector, private banks have undergone a more pronounced correction than their public sector counterparts. Nevertheless, analysts expect a recovery for the overall banking sector soon.

Constituents

Among banking stocks, large-cap lenders have witnessed mixed returns. ICICI Bank and Axis Bank have risen 25% and 17.5 % respectively in 2024. Punjab National Bank and SBI advanced 22% and 38% respectively. Bank of Baroda also added over 8%. However, IndusInd Bank shed over 10%, HDFC Bank was down 6% and Kotak Bank declined 5% in this period. 

Mid-cap banks have also given similar returns but delivered better performance than large-cap ones. Indian Overseas Bank is the top gainer, up almost 51%, followed by Punjab & Sind Bank, which rallied over 48%, and Bank of Maharashtra jumped 46%. Federal Bank rose 23% and City Union Bank was up 4%. However, Bandhan Bank shed the most, down around 21%, followed by IDFC First Bank and RBL, down over 14% each.

Blue-chip lenders or mid-cap banks?

With varying opinions from industry experts, the debate centres on stability, growth potential, and risk tolerance. Following are the insights of some analysts that could help investors make informed decisions.  

Raj Gaikar, research analyst, SAMCO Securities, prefers large-cap lenders to mid-cap ones:

Mid-cap lending companies are targeting underpenetrated niche segments, which are riskier than the customer base of large-cap lenders. Given that, the market is currently overvalued and the mid-cap lender companies may face a correction, investors with low-risk tolerance should avoid investing in mid-cap lenders for now. Currently, large-cap lenders are undervalued and are likely to deliver better performance soon. However, investing in mid-cap lenders could help investors generate alpha over the long term.

Dnyanada Vaidya, research analyst at Axis Securities, prefers large-cap lenders:  

Private banks are currently trading at attractive valuations due to their strong growth runway and steady performance delivery potential. This stability leads us to choose larger banks over their mid-sized banking peers. However, among the mid-sized banks, we like Federal Bank.

Ajit Mishra of Religare Broking, also advises prioritising large-cap lenders:  

Given the current market conditions, investors should prioritise large-cap lenders over mid-cap and small-cap lenders. The latter are trading at high valuations, presenting significant risks in the event of market corrections. Large-cap lenders, on the other hand, offer greater stability, and better risk management, and are well-equipped to handle regulatory changes. Moreover, large-cap banks have a consistent history of paying dividends and returning value to shareholders, making them a more prudent investment choice.

Atul Parakh, CEO, Bigul, advocates for a balanced investment approach: 

Investors should consider a mix based on their risk profile. Large-cap lenders are generally more stable with lower volatility, better placed to weather economic cycles, and often have stronger balance sheets. Mid-cap lenders typically offer higher growth potential, may offer better returns in bullish markets, and are often more nimble in adapting to market changes. A balanced approach might involve a core allocation to large caps for stability, with some mid-cap exposure for growth potential. The ratio would depend on individual risk tolerance and market conditions.

The choice between large-cap and mid-cap banks largely depends on individual risk tolerance and investment goals. While mid-cap banks may offer higher growth potential, they come with increased volatility. On the other hand, large-cap lenders, generally provide greater stability and consistent performance. For investors seeking safety and reliable returns, large-cap banks are the preferred option. Conversely, those willing to take on more risk for potential higher returns might consider mid-cap lenders, provided they closely monitor market conditions and the specific performance of these institutions.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of dhanamonline We advise investors to check with certified experts before taking any investment decisions.

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