Goldman Sachs has issued downgrades for prominent Indian banking institutions, namely the State Bank of India, ICICI Bank, and Yes Bank. The firm’s analysis suggests that the Indian financial sector is facing stronger headwinds, marking the end of a period characterized by robust growth and profitability.
The downgrades are rooted in several challenges confronting the banking sector. These include mounting pressure on the cost of funds due to structural funding issues and concerns about escalating consumer debt levels, which could potentially lead to deteriorating asset quality, particularly in unsecured lending. Additionally, rising wage inflation and the need for expanding distribution networks to drive deposit growth are expected to exert pressure on operating costs.
Goldman Sachs anticipates a moderation in Return on Assets (ROA) for these banks, attributed to persistent margin pressure, sluggish loan growth amid stretched loan-deposit ratios, and the necessity to rebalance their balance-sheet mix. Consequently, cost-to-income levels are projected to remain elevated.
Despite the downgrades, Goldman Sachs acknowledges that an earlier-than-expected reduction in policy rates or measures by the central bank to ease liquidity could alleviate some concerns. This would particularly benefit private banks and non-banking financial companies (NBFCs) grappling with liquidity tightness.
In light of these assessments, Goldman Sachs has revised its recommendations for individual banks. SBI has been downgraded to ‘Neutral,’ with a revised target price of ₹741. ICICI Bank has also been moved to a ‘Neutral’ rating, with a target price adjustment to ₹1,086. On the other hand, Yes Bank has been marked as ‘Sell,’ with a target price of ₹16.
These downgrades reflect Goldman Sachs' cautious outlook on the Indian banking sector amidst evolving economic conditions and underline the importance for investors to reassess their positions in light of these changing dynamics.
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