Headwinds emerging for banks, says Goldman


Mumbai: The good rally seen in Indian banking and financial sector stocks during the last few years may be coming to an end. Rising pressure on cost of funds, growing concerns about unsecured retail loans and rising operating costs could hamper the growth of Indian lenders over the next few years, according to a report by the Indian arm of the global financial powerhouse. Goldman Sachs noted.
Over the past two years, the BSE financial services index has risen 35% while the banking index has risen 31%. Global financial major downgraded SBI's rating on Friday. ICICI Bank And Yes Bank retains its 'buy' rating on HDFC Bank while upgrading Bajaj Finance Rating from 'Sell' to 'Neutral'.
“We believe the proverbial Goldilocks period – strong growth and strong/visible profitability – is over in the near-term for the financial sector as headwinds intensify,” the Goldman Sachs report said.


The headwinds include increasing pressure on the cost of funds due to structural challenges in the funding environment. Another downside for the banking and financial sector could be rising concerns over rising consumer leverage leading to potential asset quality challenges, particularly in the unsecured loan sector, which could lead to higher credit costs. It also listed pressure on operating costs for banks and financial companies due to increased wage inflation as well as the need to expand distribution networks for future deposit growth as headwinds.
Goldman Sachs analysts said they prefer lenders with a strong presence in commercial retail over lenders with a strong presence in consumer retail. He believes that entities with a strong presence in the commercial retail sector are expected to grow faster and offer better return profiles.
Goldman Sachs expects Yes Bank's share price to fall by up to 37%, SBI and ICICI Bank by between 3% to 4%, but HDFC Bank to rise by up to 33%.

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