Goldman Sachs predicts a significant transformation within India's banking landscape over the next two years, with private sector banks expected to gain a substantial advantage over their public sector counterparts. The investment bank anticipates a cyclical recovery in the Indian banking sector from FY27 to FY29, but sees private lenders as better positioned to capitalize on improved loan growth, expanding margins, and enhanced asset quality.
Private Banks Poised for Growth
According to the Goldman Sachs analysis, private banks are set to benefit from several key factors. They expect incremental disbursement spreads to improve as the mix of unsecured lending normalizes, coupled with a resolution of past asset-quality concerns related to unsecured loans. This environment should allow credit costs to remain more benign. Furthermore, liquidity coverage ratios (LCRs) between private and PSU banks have largely converged, removing a previous advantage held by state-owned lenders. Private banks are also expected to capture a larger share of FCNR(B) deposits, further strengthening their liquidity position.
Among large private banks, Goldman Sachs identifies ICICI Bank and Kotak Mahindra Bank as their top risk-reward picks. They project core pre-provision operating profit (PPoP) growth of 17% for ICICI Bank and 15% for Kotak Bank between FY26 and FY29. The brokerage has set a target price of ₹1,935 for ICICI Bank, implying a 37% upside, and ₹509 for Kotak Mahindra Bank, suggesting a 31% upside.
Challenges for PSU Banks
The outlook for Public Sector Undertaking (PSU) banks, with the exception of SBI, appears less favorable. Goldman Sachs notes that much of the recent improvement in PSU banks' return on assets stemmed from lower credit costs, while their core PPoP-to-assets remained largely flat despite a shift towards retail and SME lending and higher loan-to-deposit ratios. The brokerage anticipates rising credit costs for PSU banks following the transition to the expected credit loss (ECL) framework, an impact likely more pronounced due to their lower starting Return on Assets (RoA).
Additional pressure points for PSU banks include the expected moderation of treasury gains and recoveries from written-off loans, which have previously supported earnings. Moreover, the upcoming five-year wage revision, effective November 2027, is projected to weigh heavily on their earnings in FY28-FY29. Consequently, Goldman Sachs expects PSU bank performance to become more volatile and lag behind large private banks.
A Divergent Future for Indian Banking
For investors, the key takeaway from the Goldman Sachs report is that the next phase of the banking cycle may not lift all lenders equally. Private banks appear better positioned to convert improving liquidity, margins and asset quality into earnings growth, while PSU banks could face a tougher profitability environment.
The report underscores a clear divergence in the future trajectory of India's banking sector, suggesting that while the overall economic environment may improve, the benefits will not be uniformly distributed among all banking institutions.