Goldman Sachs Boosts Indian Financial Sector: Upgrades Axis Bank and PNB Housing to 'Buy', Downgrades SBI to 'Neutral'

Global investment powerhouse Goldman Sachs has recently revised its outlook on the Indian financial sector, indicating that the most challenging times may be behind it. In a detailed report, the firm pointed to promising early signs of improvement in asset quality and profitability among banks, prompting upgrades for certain financial entities based on their earnings potential and attractive valuations.

Positive Shifts in Indian Financials

Goldman Sachs has upgraded Axis Bank and PNB Housing Finance to a ‘Buy’ rating, while adjusting its stance on State Bank of India (SBI) from ‘Sell’ to ‘Neutral’. The firm continues to favor HDFC Bank as its top choice in the sector. Despite facing short-term earnings pressures due to potential interest rate cuts and high credit costs, Goldman Sachs believes the market will increasingly focus on medium-term advantages driven by regulatory support, improved liquidity, and stabilizing asset quality.

Near-Term Pressures Yet Hopeful Recovery

While Goldman Sachs acknowledges that Indian financials may experience profit challenges in the upcoming quarters, it also sees a silver lining. Key factors such as the delayed impact of deposit repricing following rate cuts, ongoing stress in some lending sectors, and increased credit costs in the first half of FY26 could hinder profitability for banks and non-banking financial companies (NBFCs). However, the brokerage is optimistic that investors will look beyond these short-term issues as promising fundamental trends begin to surface.

NPL Formation: Expected to peak by Q4 FY25 or Q1 FY26.
RBI Initiatives: Rate cuts and liquidity measures are set to lower risk premiums and stimulate loan growth.

Goldman Sachs anticipates that as credit conditions tighten, loan growth will stabilize, creating a more favorable environment for select lenders to thrive. "We foresee earnings reductions for the sector potentially concluding by the first half of FY26, particularly as asset quality improves and credit costs begin to decline," the report indicated.

Strategic Stock Upgrades Based on Strong Fundamentals

Goldman Sachs has set a new target price of ₹1,288 for Axis Bank, believing its earnings trajectory is approaching a low point. The bank stands to gain from enhanced systemic liquidity. "We anticipate a return to average valuations for Axis Bank, propelled by improved profitability and a supportive macroeconomic environment," the report stated.

Similarly, PNB Housing Finance received a ‘Buy’ upgrade with a revised 12-month target of ₹1,184, highlighting its strengthened position for loan growth and profitability in the coming quarters.

In light of valuation corrections, SBI has been moved to ‘Neutral’ with a new target price of ₹823. Goldman Sachs noted, "SBI’s valuation has adjusted from 1.1x forward price-to-book in September 2024 to 0.9x now, which appears justifiable considering its return on assets (RoA) of about 90 basis points."

Goldman Sachs also reaffirmed its positive outlook on HDFC Bank, anticipating a rebound in loan growth and profitability by the end of FY26. Other financial institutions included in the ‘Buy’ category are AU Small Finance Bank, Kotak Mahindra Bank, SBI Cards, Cholamandalam Investment, Shriram Finance, L&T Finance, and Aavas Financiers.

Potential Risks on the Horizon

Despite the optimistic outlook, Goldman Sachs has flagged several risks that could hinder recovery or introduce new obstacles for the sector. These include:

Repo Rate Cuts: Unforeseen deeper cuts could affect net interest margins, given that nearly 50% of loans are linked to external benchmarks like the repo rate.
High Household Leverage: With net financial savings at a decade-low of 5%, consumer lending remains a concern.
Regulatory Changes: New regulations such as the BULA Bill could impact microfinance institutions and self-employed borrowers in semi-urban and rural regions.
Macroeconomic Recovery: A delayed recovery and slower deposit growth could also affect bank performance.

Conclusion: Cautious Optimism Ahead

In summary, Goldman Sachs believes that the challenging phase for Indian financials might soon come to a close, with an anticipated stabilization in asset quality and profitability by early FY26. The firm has slightly reduced its FY26 earnings forecasts by an average of 2%, indicating limited downside from current levels. With a nominal GDP growth projection of 9.5% and sustained credit growth of 11% CAGR from FY25 to FY27, Goldman Sachs sees a favorable environment for banks and NBFCs that can successfully navigate the near-term challenges and position themselves for longer-term success.