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Goldman Sachs Downgrades SBI, ICICI Bank


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Goldman Sachs, a global brokerage firm, has downgraded major Indian banks, including State Bank of India (SBI), ICICI Bank, and Yes Bank. They believe that the favorable period of strong growth and profitability in the financial sector is ending, with increasing challenges ahead.

Key Challenges Identified

Goldman Sachs highlights several challenges faced by the Indian financial sector:

  1. Rising Cost of Funds: Structural funding challenges are leading to increased pressure on the cost of funds.
  2. Growing Consumer Leverage: Concerns are mounting over rising consumer debt, which could result in asset quality issues, particularly in unsecured lending.
  3. Operating Costs: Banks are facing elevated wage inflation and need to expand their distribution networks to support future deposit growth.

Predictions for Financial Sector Performance

Goldman Sachs predicts the following trends in the financial sector:

  • ROA Moderation: Return on assets (ROA) is expected to moderate due to margin pressures and slower loan growth.
  • Balancing Market Share and Margins: Banks are faced with the dilemma of maintaining market share while balancing margins amidst stronger balance sheets.

Potential Alleviating Factors

Goldman Sachs suggests that an early reduction in policy rates or measures by the central bank to ease liquidity could improve the situation. This would particularly benefit private banks and some non-banking financial companies (NBFCs) facing liquidity constraints.

Specific Recommendations and Adjustments

  1. Bajaj Finance: Upgraded to ‘neutral’ from ‘sell’ with a 2 percent upside.
  2. HDFC Bank: ‘Buy’ call reiterated with a 33 percent upside.
  3. State Bank of India (SBI): Earnings cut by 7-5 percent for FY25E/26E due to higher cost of funds, with expected ROA <1 percent.
  4. ICICI Bank: Shifted to ‘neutral’ from ‘buy’ with revised target price and expectations of moderated profitability.
  5. Yes Bank: Downgraded to ‘sell’ from ‘neutral’ due to subpar ROEs and challenges in margin profile and credit cost improvements.

Conclusion

Goldman Sachs acknowledges the recent stock performance but expresses concerns about the underlying fundamentals of some banks. They adjust their recommendations and target prices accordingly based on their analysis.

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