 "Goldman Sachs downgrades ratings on shares of SBI, ICICI, YES Bank")
The Goldilocks era, characterised by robust growth and strong profitability, has come to a close for Indian banks due to multiple headwinds in the near term, Goldman Sachs said in a report on Friday.
The brokerage downgraded State Bank of India and ICICI Bank to “neutral” from “buy”, while it upgraded Bajaj Finance to “neutral” from “sell”. It also downgraded YES Bank to “sell” from “neutral”. HDFC Bank, which was under selling pressure since the announcement of the third-quarter (Q3) results, managed to keep a “buy” rating with the broking firm expecting a 33 per cent upside. HDFC Bank’s stock had declined 17.5 per cent after declaring the Q3 results on January 16. It recovered 2.7 per cent.
Goldman Sachs said Indian banks, which reported a sharp expansion in return on assets since 2019-20, might face moderation ahead due to headwinds like margin compression and a stretched credit-deposit rate. It would impact loan growth, it said.
“The sector will have to repair its balance-sheet mix and this, coupled with the need of building capacity, should keep cost-to-income levels elevated,” the report said.
“We believe all players face the dilemma of maintaining market share or compromising margins amid the backdrop of stronger balance sheets across the system.” It said the challenges included mounting pressure on the cost of funds driven by structural funding issues, and escalating concern regarding rising consumer leverage.
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These factors posed significant potential challenges to asset quality, particularly in unsecured lending, potentially leading to increased credit costs, it said.
In November, the Reserve Bank of India had increased the risk weighting for unsecured loans, which could increase the cost for the lenders.
The brokerage said financial institutions were likely to experience heightened pressure on operating costs due to elevated wage inflation. Additionally, there was a pressing need for banks to expand their distribution networks to facilitate future deposit growth, it said.
The report said if the central bank were to implement a rate cut sooner than anticipated, it could address liquidity issues in the system.
Alternatively, measures such as adjusting the cash reserve ratio (CRR) or statutory liquidity ratio (SLR) could also support deposit growth. This would be particularly beneficial for private banks currently facing challenges due to high loan-to-deposit ratios and limited liquidity coverage ratios, the report added.
It said such measures could provide some relief for non-banking financial companies (NBFCs), which are experiencing elevated funding costs amid tight liquidity conditions.