SBI, ICICI Bank, Yes Bank Downgraded By Goldman Sachs As 'Goldilocks Period' Ends
However, the brokerage upgraded Bajaj Finance Ltd. to 'neutral' from 'sell' and reiterated a 'buy' call on HDFC Bank with an upside of 33%.
Goldman Sachs foresees multiple challenges ahead for the Indian financial sector, causing it to cut earnings estimates across its coverage universe, from the State Bank of India to ICICI Bank Ltd. and Yes Bank Ltd.
There are increasing headwinds for Indian banks, such as rising pressure on the cost of funds, growing concerns about rising consumer leverage, and pressure on operating costs due to elevated wage inflation, Goldman Sachs said in a note on Feb. 23.
"We believe the proverbial Goldilocks period is over for the financial sector in the near term as headwinds are increasing," the note said.
The brokerage firm had cut earnings estimates in their coverage by 5% on average over FY25 and by 2% for FY26. "However, for select names, we are lower by mid-to-high single digits," the firm said.
On the back of the rising headwinds in the financial space, the brokerage firm has downgraded State Bank of India and ICICI Bank to 'neutral' from 'buy', with a downside of 4% and an upside of 3%, respectively. Goldman Sachs downgraded Yes Bank to 'sell' from 'neutral' with a downside of 37%.
However, the brokerage upgraded Bajaj Finance Ltd. to 'neutral' from 'sell' and reiterated a 'buy' call on HDFC Bank with an upside of 33%.
The return on assets for the financials is set to moderate hereon, the note said. The ROA will start moderating given the continued pressure on margins and elevated cost-to-income levels.
"We believe all players face the dilemma of maintaining market share or compromising margins amidst the backdrop of stronger balance sheets across the system."
The brokerage, however, noted that the sector valuations have been at a comfortable level.
Rating Highlights
State Bank of India: Downgraded to 'neutral' from 'buy' (downside of 4%).
ICICI Bank: Downgraded to 'neutral' from 'buy' (upside of 3%).
Yes Bank: Downgraded to 'sell' from 'neutral' (downside of 37%).
Bajaj Finance: Upgraded to 'neutral' from 'sell'.
HDFC Bank: Reiterates 'buy' (upside of 33%).