Banking Stocks vs IT Stocks: Which Sector Offers Better Risk-Adjusted Returns?

Banking and information technology (IT) are among the two biggest contributors to the Indian equity markets but have performed differently so far in 2026. Banking stocks remain strong on credit growth, strong valuations and low volatility, while IT stocks face slower global technology spending but have long-term growth potential. 

Banking Outperforms IT on Returns

Nifty Bank TRI returned -1.94%, 7.91% and 9.68% over 1-year, 3-year and 5-year periods, respectively, as per the benchmark Total Return Index (TRI) data compiled in ICICI Prudential's passive factsheet for May 2026. In comparison, Nifty IT TRI returned -20.30%, 2.02%, and 3.53%, respectively.

Additionally, banking scores better on risk indicators. The one-year annualised volatility of NSE Indices for Nifty Bank was 15.91% while the one-year annualised volatility of Nifty IT was 21.81%, as per the Factsheets released by NSE Indices on Wednesday, 29 May 2026. 

With the risk-free rate being 5.79%, the estimated Sharpe Ratios for Nifty Bank and Nifty IT are -0.49 and -1.20, respectively, over one year. Both sectors continue to be negative, even though banking has had better returns compared to risk.

Banks Trade at More Attractive Valuations

A further boost to the banking sector investment case comes from valuations. The banking index is trading at 13.69 times P/E and 1.85 times P/B as compared to the 19.79 P/E and 5.40 P/B of the IT index. This implies that investors have paid a lot less for banking earnings, even though these earnings have been impressive recently.

Banks: SBI (10.9 P/E), Kotak Mahindra Bank (21.1), HDFC Bank (15.3), ICICI Bank (16.6), Axis Bank (15.8) are good value at relatively low valuations among banking leaders. 

Meanwhile, IT companies, such as Infosys, TCS, HCLTech, Tech Mahindra, and Wipro, operate at higher multiples, as they are hoping for strong long-term profits.

Macro Trends Favor Banking

Reuters reports that private banks are projected to report 8-12% year-on-year profit growth in Q4 FY26, while SBI has upped its FY26 loan growth target to 13-15%.

The policy stance adopted by the RBI after the 125 basis points of rate cuts since February 2025 has also made for a beneficial environment for credit growth.

Meanwhile, the technology industry has seen weak discretionary tech spending across the globe. Revenue growth of large IT companies is projected to be subdued in FY27. 

Despite the IT sector's $98.4 billion revenue in FY26, AI is changing the landscape of employment and business practices in the country. The CEO of TCS, N. Chandrasekaran, recently stated that the company's vision is to "balance its workforce with AI agents," indicating opportunities and disruption.

Also Read: Survey Highlights JPMorgan's Leadership in Enterprise Blockchain Across Banking Sector

Which Sector is better?

Banking presents a better opportunity for investors looking for less risk and steady income. The sector offers lower volatility, cheaper valuations, improved historical performance for conservative investors, and increased earnings visibility.

In the long run, IT continues to be a growth market, driven by digital transformation and AI. But the sector will be more volatile until global demand improves. The recent pullback could be a sign of a bargain for investors with more aggressive inclinations, but it could also represent a safer risk-reward proposition for investors.