Goldman Sachs turns constructive on Indian financials; upgrades Axis Bank, PNB Housing to ‘buy’, SBI to ‘neutral’

Global investment firm Goldman Sachs has adopted a more optimistic view on Indian financials, suggesting that the worst may be behind for the sector. In a recent report, the brokerage highlighted early signs of improvement in asset quality and operating profitability, prompting it to upgrade select banking and financial names based on earnings visibility and valuation comfort.

Goldman Sachs upgraded Axis Bank and PNB Housing Finance to ‘Buy’, and revised State Bank of India (SBI) to ‘Neutral’ from ‘Sell’, while reiterating HDFC Bank as its top pick in the sector. Despite near-term pressures on earnings owing to potential rate cuts and elevated credit costs, the brokerage expects the market to look past these challenges, focusing instead on medium-term opportunities supported by regulatory easing, better liquidity, and stabilising asset quality.

Near-Term Challenges, but Light at the End of the Tunnel

According to Goldman Sachs, Indian financials may still face earnings pressure over the next few quarters. Factors such as the lagged impact of deposit repricing after rate cuts, continued stress in some lending segments, and higher credit costs in the first half of FY26 are likely to weigh on the profitability of banks and non-banking finance companies (NBFCs). However, the brokerage is of the view that investors may start to discount the medium-term positives, as certain fundamental tailwinds begin to emerge.

Goldman Sachs expects new non-performing loan (NPL) formation to peak by the fourth quarter of FY25 or the first quarter of FY26. Simultaneously, measures from the Reserve Bank of India (RBI)—such as rate cuts and liquidity infusions—are expected to not only reduce risk premia but also support loan growth dynamics. The firm believes that as credit filters tighten, loan growth will likely consolidate, creating a more stable environment for select lenders to outperform.

“Our base case assumes that earnings cuts for the sector may end by 1HFY26, particularly as asset quality trends improve and credit costs begin to moderate,” said Goldman Sachs in its report. “We are already witnessing early signs of this in bureau data, especially in the unsecured retail loan segment, though stress in NBFC business banking continues to linger.”

Stock Upgrades Backed by Visibility and Valuation Comfort

Goldman Sachs upgraded Axis Bank to ‘Buy’ with a revised 12-month target price of ₹1,288 per share. The brokerage believes the bank’s earnings and growth trajectory are nearing the bottom and that it stands to benefit from increased systemic liquidity. “We expect Axis Bank to experience valuation mean-reversion, supported by improving profitability and a more benign macro backdrop,” the note added.

PNB Housing Finance was also upgraded to ‘Buy’ with a new 12-month target price of ₹1,184, as Goldman Sachs sees improving visibility on both loan growth and profitability. The firm highlighted that PNB Housing is now better positioned to deliver healthy return metrics over the next few quarters, supported by favourable spreads and manageable asset quality.

SBI, India’s largest lender, was moved to ‘Neutral’ from ‘Sell’, with a revised price target of ₹823. According to Goldman Sachs, the bank’s valuation has corrected significantly, making the risk-reward trade-off more balanced. “SBI has de-rated from 1.1x forward price-to-book in September 2024 to 0.9x currently, which appears fair given its RoA profile of around 90 basis points,” the report noted.

In addition to these, Goldman reiterated its positive stance on HDFC Bank, citing expectations of a recovery in loan growth and PPOP-ROA by the end of FY26. Other names that remained in its Buy list included AU Small Finance Bank, Kotak Mahindra Bank, SBI Cards, Cholamandalam Investment, Shriram Finance, L&T Finance, and Aavas Financiers.

Key Sector Risks Remain on the Horizon

Despite turning more constructive, Goldman Sachs warned of several risks that could delay the recovery or create fresh headwinds for the sector. These include sharper-than-expected repo rate cuts, which could put pressure on net interest margins (NIMs), especially as nearly 50 percent of loans in the system are linked to external benchmarks like the repo rate.

The brokerage also pointed to elevated household leverage, with net financial savings at a decade-low of 5 percent. Although this trend has begun to reverse, it remains a point of concern for consumer lending. Regulatory developments like the BULA (Banning of Unauthorised Lending Activities) Bill could impact microfinance institutions and subprime/self-employed borrower segments, especially in semi-urban and rural areas.

Delayed macroeconomic recovery and slower deposit mobilisation are other factors that could weigh on bank performance. Goldman Sachs also cautioned about potential resurgence in competitive intensity in the second half of FY26, especially in the retail and consumer lending space, which could pressure yields further.

Outlook: Selective Optimism with Emphasis on Fundamentals

In conclusion, Goldman Sachs noted that the “muddle-through” phase for Indian financials might be nearing an end, with a likely bottoming out of PPOP-ROAs and asset quality stabilisation by early FY26. The brokerage reduced its FY26 consensus EPS forecasts by an average of just 2 percent, suggesting limited downside from current levels.

With nominal GDP growth forecast at 9.5 percent and credit growth expected to sustain at 11 percent CAGR over FY25–27, Goldman Sachs sees a supportive backdrop for banks and NBFCs that can navigate the near-term turbulence and position themselves for medium-term gains.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.