Informist, Friday, Feb 23, 2024

MUMBAI – Goldman Sachs has downgraded State Bank of India and ICICI Bank to "neutral" from "buy" earlier, and YES Bank to "sell" from "neutral" earlier. The foreign brokerage has slashed earnings estimates for Indian banks and non-banking finance companies across the coverage universe by an average of 5% for 2024-25 (Apr-Mar).

"We believe the proverbial Goldilocks period (strong growth and strong/visible profitability) is over for the financial sector in the near-term as headwinds are increasing," Goldman Sachs said in a report today.

The brokerage expects rising pressure on cost of funds due to structural challenges in the funding environment, and growing concerns on rising consumer leverage to pose potential asset quality challenges, particularly in unsecured lending, leading to higher credit costs.

Goldman Sachs also sees operating costs rising due to elevated wage inflation as well as the need to expand the distribution network for future deposit growth. "We believe all players face the dilemma of maintaining market share or compromising margins amidst the backdrop of stronger balance sheets across the system," it said in the report.  

Goldman Sachs cut the earnings estimate for SBI by 7% and by 5%, respectively, over 2024-25 and 2025-26, respectively, mainly on account of higher cost of funds. It now expects the return on assets of the bank to be lower than 1% over the next two financial years.

"Deterioration in the macro due to stress in rural/unsecured consumer loans would pose downside risk to our assumptions for loan growth and credit cost, which in turn would impact our profitability estimate (for SBI)," the brokerage said. It also expects the continued increase in SBI's cost of deposits to pressure its net interest margin and impact profitability estimates.

For ICICI Bank, the brokerage highlighted rising delinquencies in its unsecured loan book, which grew at a faster pace in the past two financial years. "Higher-than-expected deterioration in asset quality in those products would warrant a higher credit cost, which in turn would pose downside risk to our profitability estimates," the report said.

ICICI Bank faces a trade-off between loan growth and profitability at this junction. Therefore, any sharp expansion in the loan-deposit ratio from higher-than-expected loan growth or lower-than-expected deposit growth could impact its growth outlook and margins as cost of funds increases.

Goldman Sachs cut the earnings per share estimates of ICICI Bank for the next two financial years by 3.4% and by 4.9%, respectively, mainly on account of higher cost of funds. It expects the return of assets to moderate from the peak levels of 2.3% in the current financial year ending March to 2.0% in 2025-26.

For YES Bank, it slashed the earnings per share estimate by 43% in 2024-25 and the book value per share by 6.6%.

At 1357 IST, shares of YES Bank were down 1.67% at 26.70 rupees, those of SBI were down 0.83% at 759.30 rupees, while those of ICICI Bank were flat at 1063 rupees, on the National Stock Exchanges.  End

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Reported by Richard Fargose

Edited by Tanima Banerjee

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