Global brokerage firm Goldman Sachs has revised its outlook on several Indian banking giants, including State Bank of India (SBI), ICICI Bank and Yes Bank, warning of the end of a favourable growth period and mounting challenges in the financial sector.

What Happened: Goldman Sachs analysts highlighted major hurdles, such as the structural funding challenges leading to elevated pressure on the cost of funds and the potential asset quality challenges arising from growing consumer leverage, particularly in unsecured lending.

They also pointed out the impact of wage inflation on operating costs and the need for banks to expand their distribution networks to support future deposit growth.

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Speedbreakers Ahead: While acknowledging the recent robust performance of domestic banks, Goldman Sachs anticipates a moderation in return on assets (ROAs) due to sustained margin pressure, slower loan growth, and the need to rebalance the balance sheet mix. The brokerage emphasised the dilemma faced by banks in balancing market share retention with margin preservation.

However, Goldman Sachs also suggested that an earlier-than-expected reduction in policy rates or liquidity easing measures by the central bank could alleviate liquidity concerns and support deposit growth, benefiting private banks and non-banking financial companies (NBFCs).

In terms of specific recommendations, Goldman Sachs upgraded Bajaj Finance to “neutral”, seeing a 2% upside, and reiterated a “buy” rating for HDFC Bank with a 33% upside.

However, the firm adopted a more cautious stance on SBI, downgrading it to “neutral” and adjusting its target price upwards to ₹741.

Similarly, ICICI Bank was downgraded to “neutral” with a price target of ₹1,086 due to expectations of moderating profitability, particularly in consumer lending.

Yes Bank received a “sell” rating and a price target of ₹16 due to concerns about its margin profile and credit cost improvements, despite recent stock price rallies.

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