Profitability of Banks in India coming under pressure: Goldman Sachs

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Goldman Sachs Group Inc. predicts that Indian banks will face increasing headwinds and expects their returns on assets (ROAs) to decline in the coming quarters. According to Rahul Jain, co-head of Asia Pacific Financials Research at Goldman, Indian banks had been in a favorable period over the past few years, with improvements in their top line and loan growth. However, this period is now over, and Goldman Sachs expects the ROAs of Indian banks to start moderating.

Factors Affecting Indian Banks

Goldman Sachs highlights several factors that are contributing to the challenges faced by Indian banks. These include tighter liquidity conditions, increased scrutiny over unsecured lending, and the need for banks to invest in expansion and build up their capacity to mobilize more deposits. These factors are expected to have a negative impact on the top line of Indian banks.

Selective Investment in Indian Financial Stocks

Given the current situation, Goldman Sachs suggests that investors need to be selective when it comes to investing in Indian financial stocks. The firm downgraded ICICI Bank Ltd., State Bank of India, and Yes Bank Ltd. in late February and has a “market weight” call on the broader financial sector in India. Goldman Sachs has also lowered its earnings estimates for these banks by mid-single-digit percentage terms to below-consensus levels.

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Potential Challenges for Indian Banks

Goldman Sachs points out that Indian banks are likely to experience slower growth due to potential asset-quality challenges as the credit cycle plays out. This could impact their revenue margins and fee income. Additionally, the increasing pressure on the cost of funds, concerns about unsecured retail loans, and rising operational costs are expected to impede the growth of Indian lenders in the next couple of years.

Loan Growth and Consumer Leverage

While Goldman Sachs believes that structural drivers are in place for loan growth in line with or higher than GDP growth in the longer term, they anticipate some consolidation in the consumer-retail space in the near term. This is due to the leveraging of household balance sheets. However, Goldman Sachs still sees potential for growth in entities with a strong presence in the commercial retail space, which are expected to offer better returns.

Loan-to-Deposit Ratio and Slower Growth

Goldman Sachs highlights that around 70% to 80% of Indian banks’ assets are funded by deposits, and the banking system is currently at the peak of the loan-to-deposit ratio. This indicates that slower growth is expected in the sector.

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Contrasting Views on India’s Banking Sector

Goldman Sachs’ view on India’s banking sector contrasts with research analysts from JPMorgan Chase & Co., who stated that India’s corporate lenders are “the single largest opportunity” among Asia Pacific financial stocks. It’s important to note that different analysts may have varying perspectives on the market.

In conclusion, Goldman Sachs expects declining returns on assets for Indian banks in the coming quarters. Factors such as tighter liquidity conditions, increased scrutiny over unsecured lending, and the need for banks to invest in expansion and build up their capacity are contributing to the challenges faced by Indian lenders. Investors are advised to be selective when investing in Indian financial stocks.

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  1. Indian banks, more particularly the public sector banks are already in stress. Their practices of ‘Window dressing’ and ‘asset bubbles’ continuing as usual and the same can be confirmed from the financial statements immediately after a week’s time from the date of publication of yearly results of 31st March. The same is well within the knowledge of the Stakeholders (the government) and the Regulator (RBI), however they remain satisfied always with the Rosy pictures as drawn in every quarter and on the yearly closing date of 31st March every year.
    Most interesting fact that never draws attention neither to the Stakeholder nor to the Regulator is about internal Audit & Inspection system of public sector banks to assess how precious resources of the nation are misused to fulfill individual lusts of a section. However the Regulator shed it’s responsibility by imposing some penalties at regular intervals by quoting some lapses only.

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