Goldman Sachs revises banking sector outlook, expects 10-12% credit growth, better profitability: Rahul Jain

Time of India

23-04-2025

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MD, Head of India Equity Research, Co-Head Asia Financial Research,, says they have changed the outlook on the banking sector from one of caution to one of light at the end of the tunnel. From being in a muddle through for the good part of the last one, one-and-a-half years, the sector will see profitability starting to improve but the only element one has to keep an eye on is credit growth . Given that GDP growth has been sluggish, Goldman Sachs expects a delayed pick up in credit growth in the range of 10-12% for the sector. They will see how it plays out depending on the GDP growth.Let's take a step back. We have revised our view on the Indian banking sector. We were a bit cautious for the majority part of the last one, one-and-a-half years, but as we start to look out into this financial year, we feel that the sector will start having better visibility on its profitability over the next couple of quarters. This will be on the back of two important variables, one of which is the credit cost.For the last two years, we have been quite cautious on the unsecured lending across different segments. We clearly see that starting to peak in terms of the pain point for the banking sector and that will mean that over the next one or two quarters, the credit cost will start to peak out for the sector and also on the margins front given that the Reserve Bank of India started cutting the repo rate, we feel that most of the impact on the margin should be reflected by the second quarter.By second quarter, we expect the EPS cuts to start bottoming out and there getting to your point about the start of the earning season has been rather good, the lenders have managed to maintain their profitability and there we have already seen the cut in savings rate, etc, which will also support the profitability, the impact of the NIMs would be well absorbed from the policy rates.We feel that this is the scenario of light at the end of the tunnel for the sector from being in a muddle through for a good part of the last one, one-and-a-half years, the profitability will start improving but the only element which we are watching out for is the credit growth. Given that the GDP growth has been sluggish, we expect a delayed pick up in credit growth. We expect the growth to be in the range of 10% to 12% for the sector and then we will see how it plays out depending on the GDP growth.If you look at the theme, over the last couple of months, the regulators have been rather supportive of the sector. They have taken multiple measures to infuse or improve the liquidity scenario for the financial sector and the guidelines on the LCR are perhaps along similar lines.Of course, the draft guidelines had caused a concern amongst the lenders about preserving their LCR because of the runoff factor, but clearly the guidelines that came out went on to reinforce the view that the regulators are willing to support the liquidity measures in the sector and this is going to help the lenders to better manage their cost of funds and also therefore result in better management of the margins.This goes back to the point that I was making earlier, that the lenders have been quite cognisant of the fact that the NIMs will have to be managed and every incremental support that is coming from the RBI is going to help the lenders manage their profitability over the next couple of quarters.We would agree with that. The earnings that have come out so far and the commentary that we have seen or the business updates that have come out clearly seems to indicate that the pain in the MFI space is fully reflected into the earnings estimates of the street and clearly you will see better trends going forward. But I would also like to caution that the first half is typically a weaker period for the MFI space because of lack of business activity and perhaps some more NPL formation.Therefore, we will have to see how the second half of the financial year plays out. The government had put out for the public comments how that gets implemented and what impact it would have on these segments will also have to be watched out for in the second half. But whatever pain point the sector had witnessed because of the change of the lender norms or the Karnataka ordinance impact, has been by and large factored into the numbers and have been absorbed by the industry and incremental trends have been pointing towards a better direction.The way we would see it is that the private banks have continuously gained market share in the deposit market and on the lending side, both private banks and NBFCs have been doing a decent job. All that has led to a bit of pricing pressure in select pockets such as mortgages or the larger corporate loans.But investors clearly seem to prefer the entities that can produce predictable earnings quality and stable profitability profiles. So, the private banks and NBFCs are being preferred by the investors that we are speaking to at this point of time.The outlook has improved. Like I was saying earlier, we will have the repo cut related impact on the margins; but on the other hand, the regulators have supported the sector by infusing liquidity. The wholesale money market rates have dropped which will also support the lenders and then thereafter we are also starting to see the cuts coming through in the deposit rates. We have seen the savings rate being cut by pretty much all the important lenders, the large lenders in the private space, the term deposit rates have been cut. So, the lenders are trying very hard to manage the margins.Of course, we will see an impact. The margins will trend lower before starting to stabilise. So, it will be a first half phenomenon. Second half onwards, we expect the trends to start to stabilise which is why we feel there is a light at the end of the tunnel. The ROA started to stabilise from Q2 onwards for the sector and that is something that the investors seem to be liking and that is the reason why the sector is rallying at this point of time.But like I said, the credit growth needs to be watched and there we are expecting some improvement in the second half driven by the variety of policy measure that both the Government of India has taken in the form of tax cuts, leaving more money in the hands of the households, plus the interest cut will also improve the disposable income. All of that should start to come to the support of the credit environment in the second half and then we will see how this plays out next year. The credit growth will be 10% to 12% and not substantially higher than that.