Why Goldman Sachs is turning wary of Indian bank stocks

Global brokerage firm Goldman Sachs has downgraded ratings on banking majors State Bank of India (SBI), ICICI Bank and Yes Bank, saying that the headwinds are increasing for the Indian financial services sector. The firm has downgraded SBI to 'Neutral' with a target price of ₹741 per share.

“At the current valuation of 1.2x on a 1-year fwd P/B basis (standalone) and the dynamics around profitability, we believe the stock is trading at a fair valuation. Based on our valuation methodology, we raise our 12-month target price to ₹741 per share,” the brokerage said.

Additionally, ICICI Bank has also been downgraded to 'Neutral' with a target price set at ₹1,068 per share.

ICICI Bank, which has seen success in boosting its return on assets (ROAs) post-Covid, is expected to face profitability moderation due to the consolidation in consumer lending, the brokerage said.

Meanwhile, Yes Bank has been marked as 'Sell' with a target price of ₹16 per share.

Despite recent stock rallies, Goldman Sachs believes the bank's fundamentals are under pressure due to a subdued margin profile and credit cost challenges.

In contrast, the brokerage firm has upgraded Bajaj Finance to 'Neutral' from 'Sell' with a target price of ₹6,815 per share.

HDFC Bank retains its 'Buy' rating with a target price of ₹1,915 per share.

Goldman Sachs analysts indicate that the financial sector might be entering a challenging phase, as the "Goldilocks period" (strong growth and strong or visible profitability) is likely over in the near term.

Structural challenges in the funding environment are contributing to rising pressure on the cost of funds, posing concerns for banks.

The report emphasised growing worries about increasing consumer leverage, potentially leading to challenges in asset quality.

Despite these challenges, the report noted that sector valuations have remained at a comfortable level.

However, the changing economic conditions have prompted Goldman Sachs to revise its stance on various banking entities.

Rahul Jain, Head of India Research at Goldman Sachs, further expressed concerns about the surge in unsecured loans within the banking sector.

Despite this, he noted that investors seem to favour the liquidity position of Public Sector Undertaking (PSU) banks over private banks.

Jain suggested that NBFCs focusing on commercial retail may present more attractive opportunities compared to those linked to consumer lending.

The emerging challenges in the financial sector stem from structural issues in funding, further exacerbated by the Reserve Bank of India's (RBI's) recent decision to increase risk weights on unsecured loans, including credit card dues.

In an earlier conversation with CNBC-TV18, Santanu Chakrabarti, an analyst at BNP Paribas, expressed concern over an impending margin squeeze in the banking industry.

He anticipated a potentially challenging scenario until September 2024.

Chakrabarti identified IndusInd Bank and AU Small Finance Bank as promising options for investors looking to capitalise on opportunities during this corrective phase.