Goldman downgrades ratings of SBI, ICICI Bank, Yes Bank, warns of stronger headwinds

Goldman Sachs said that an earlier-than-expected cut in policy rates would alleviate liquidity concerns in the system

Global brokerage firm Goldman Sachs has downgraded banking giants State Bank of India, ICICI Bank and Yes Bank, saying that the Goldilocks period of strong growth and strong or visible profitability was over for the financial sector for the near term. It added that headwinds were intensifying for the Indian financial services sector.

Major challenges include rising pressure on the cost of funds, due to structural funding challenges, and growing concerns on rising consumer leverage, which poses potential asset quality challenges. In unsecured lending, particularly, this could lead to higher credit costs. Further, banks could feel the pressure on operating costs due to elevated wage inflation, and also need to expand the distribution network for future deposit growth, said Goldman Sachs.

Also Read: Private capex is seeing action heat up, here’s a road map for investors

Domestic banks recorded a sharp ROA (return on assets) expansion in FY20-3QFY24. Now, the brokerage believes that ROAs will start moderating due to continued pressure on margins which are expected to extend to FY25, slower loan growth as loan-deposit ratios are stretched and that the sector will have to repair its balance-sheet mix and this, coupled with the need of building capacity, should keep cost-to-income levels elevated.

“We believe all players face the dilemma of maintaining market share or compromising margins amidst the backdrop of stronger balance sheets across the system,” said analysts at Goldman Sachs Equity Research.

However, the brokerage said that an earlier-than-expected cut in policy rates would alleviate liquidity concerns in the system or any measures by the central bank to ease the liquidity through CRR/SLR should aid in deposit growth and would augur well for all private banks in particular which are currently constrained with stretched loans-to-deposit ratios and limited buffers on liquidity coverage ratios and, to a certain extent, for NBFCs which are witnessing an environment of elevated costs of funds due to liquidity tightness.

Goldman Sachs upgraded Bajaj Finance to ‘neutral’ from ‘sell’ (2 percent upside) and reiterated the ‘buy’ call on HDFC Bank (33 percent upside).

Brokerage Call

SBI: Neutral - CMP: Rs 766.95 - Target Price: Rs 741

Goldman Sachs cut State Bank of India’s earnings by 7 percent and 5 percent over FY25E/26E mainly on account of a higher cost of funds and now expects the ROA of the bank to be <1 percent over FY25-26E.

“Since we added the stock to our Buy list on Aug 24 2020, the stock is up 283 percent vs the BSE30 +87 percent. At the current valuation of 1.2x on a 1-yr fwd P/B basis (standalone) and the dynamics around profitability, we believe the stock is trading at a fair valuation. Based on our valuation methodology, we raise our 12-month target price to Rs 741 per share,” the brokerage said while downgrading the stock to ‘Neutral’.

ICICI Bank: Neutral - CMP: Rs 1,061.55 - Target Price: Rs 1,086

“While ICICI Bank has been quite successful in scaling up its ROAs post Covid driven by its shift towards a higher-yielding mix, digital banking which also allowed it to scale up its consumer lending, diversification into SME lending etc, we expect the consumer lending to go through consolidation and hence expect ICICI Bank’s profitability to also moderate,” said Goldman Sachs.

Also Read: Global stocks set for gains, not fireworks, in months ahead: Poll

ICICI Bank has grown its unsecured book quite aggressively (25 percent of incremental loan growth over FY22-23) and with rising delinquencies in this book, the brokerage expects it to also impact its operating profit growth (due to income reversals).

“Since we added it to our buy list on 23 Oct 2016, the stock has risen 315 percent vs the BSE 30 Sensex of 160 percent. We revise our 12-month SOTP to Rs 1,086 from Rs 1,179 and downgrade the stock to ‘Neutral’ from ‘Buy’,” Goldman Sachs said.

Yes Bank: Sell - CMP: Rs 27.25 - Target Price: Rs 16

The stock has rallied 36 percent over the last 3 months and 65 percent over the last 12 months vs Bank Nifty's performance of  +7%/17%. However, the fundamentals have been under pressure due to its subdued margin profile as well as a bottoming of credit cost improvements.

“We believe its ROEs are going to remain sub-par despite improvements due to the above-mentioned challenges and hence the current valuations appear rich. As a result, we downgrade to ‘Sell’ from ‘Neutral’. We cut EPS by 43 percent in FY25 and BVPS by 6.6 percent but maintain our 12-month target price at Rs 16,” said Goldman Sachs.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.