Axis Bank, PNB Housing Get 'Buy' Upgrade As Goldman Sachs Sees Light At End Of Tunnel For Banks

Goldman Sachs has upgraded Axis Bank Ltd. and PNB Housing Finance Ltd. to 'buy', signalling a positive outlook for Indian banks as the sector shows early signs of improvement in asset quality and operating profitability. The brokerage also upgraded State Bank of India Ltd. to 'neutral', reflecting a balanced risk-reward scenario.

The "muddle through" scenario for Indian financials is nearing an end, with asset quality stabilising and operating profitability showing signs of improvement, according to Goldman Sachs.

The brokerage has upgraded Axis Bank to 'buy' with a revised 12-month target price of Rs 1,288 per share, citing valuation mean-reversion and expected profitability growth. PNB Housing has also been upgraded to 'buy', with a target price of Rs 1,184 per share, due to its healthy loan growth and robust profitability.

State Bank of India has been upgraded to 'neutral' from 'sell', with a revised price target of Rs 823 per share. The potential risks and rewards of investing in the stock are now balanced, according to Goldman Sachs.

The stock's valuation has decreased from 1.1 times its book value in September 2024 to 0.9 times now. This lower valuation seems reasonable for a company with a return on assets of about 0.9%, the brokerage said.

Goldman Sachs expects the sector to reach an inflection point as Return on Assets stabilise. The brokerage anticipates that EPS cuts will end in the first half of fiscal 2026, driven by bottoming PPOP-ROAs and improving asset quality trends.

Despite near-term pressures from sluggish credit growth and elevated credit costs, the sector is expected to recover as new non-performing loan formation peaks and regulatory easing measures improve growth dynamics, the brokerage noted.

While Goldman Sachs remains constructive on the sector, it highlights potential risks such as sharper repo-rate cuts impacting net interest margins, elevated consumer leverage, and delayed macro recovery.

Implementation of the Banning of Unregulated Lending Activities bill could also pose challenges for microfinance institutions and subprime segments in semi-urban and rural areas, the brokerage said.