 "Goldman Sachs")
Turning cautious on the Indian banking sector, global brokerage Goldman Sachs, on Friday, downgraded some stocks from the pack, including State Bank of India and ICICI Bank, as it believes the "Goldilocks period" for the sector may be coming to an end.
The proverbial Goldilocks period of strong growth and strong/visible profitability, Goldman Sachs said, is over for the financial sector in the near-term as headwinds are increasing.
"Risks from rising cost of funds, growing pressure on consumer leverage, and mounting operating costs are rising. We have, thus, cut our earnings estimates across coverage universe by 5 per cent/2 per cent on average over FY25E/26E, and are below consensus on aggregate net profit by 2 per cent/1 per cent for FY25/26; however, for select names, we are lower by mid-to-high single digits," it said.
The brokerage has downgraded SBI and ICICI Bank to 'Neutral' from 'Buy'; and downgraded YES Bank to 'Sell' from 'Neutral'. Meanwhile, it has upgraded Bajaj Finance to 'Neutral' from 'Sell'; and has reiterated 'Buy' on HDFC Bank.
Here're the top headwinds for Indian banks as per Goldman Sachs:
Challenging deposit growth
According to the brokerage, the share of deposits in the household financial asset mix has decreased to 45 per cent in FY23 (compared to 48 per cent in FY21), with incremental flow of only 35 per cent going towards deposits.
This, it said, has led to flows of net financial assets as a proportion of GDP to more than halve from FY21 to FY23.
"Bank deposits also see competition from government small savings investments which have now grown to 20 per cent of the total deposit pool in the system, and offer higher interest rates compared to bank term deposits," Goldman Sachs said.
With system loan-to-deposit ratio (LDR) nearing an all-time high, the potential for future credit growth remains clouded.
Margin compression, rising cost of funds
Public sector banks are amassing deposits at an average rate of 6.88 per cent at present, higher than 6.82% per cent in March, 2023.
The private sector banks, on the other hand, have seen their average deposit rate inching up to 6.49 per cent in December, 2023, vs 6.31 per cent as of June, 2023.
Meanwhile, lending rates declined for public sector banks at 8.51 per cent (16 bps lower than March, 23) as against an increase in the same by private sector banks (up 12bps to 10.2 per cent in December, 2023).
"With a higher cost of funds and limited increase in yields, spreads have contracted for public sector banks to 1.63 per cent, while remaining steady for private sector banks. Therefore, we model a higher cost of funds across our coverage in FY25 (up 20bps Y-o-Y on average), with lower net interest margins (NIMs) (down 10bps vs FY24E)," it said.
RoAs to come under pressure
The Reserve Bank of India's guidelines to increase risk-weights on unsecured products saw banks' unsecured books' growth slowing down.
According to the RBI's data, Credit Cards and Personal loans' growth dipped from 74 per cent and 72 per cent Y-o-Y in Q2FY23 to only 5 per cent and 28 per cent in Q2FY24, respectively.
Goldman Sachs pegs growth in these books in the range of 11-27 per cent CAGR over FY24-26E for top private banks vs 15-44 per cent over FY22-24.
"Our coverage companies realised 6-72bps higher pre-tax return on asset (RoA) on 14-44 per cent Y-o-Y growth in the past one year before the RBI's guidelines took effect. Therefore, with a reversal of growth underway, the additional RoA could see downside potential," the brokerage said.
GS expects a moderation in private banks' RoA from a peak in FY24 at 1.93 per cent to 1.88 per cent in FY26.
That said, Goldman Sachs highlights that an earlier-than-expected cut in policy rates would alleviate liquidity concerns in the system, and adoption of any measures by the central bank to ease the liquidity through CRR/SLR should aid in deposit growth would augur well for banks.
