Global brokerage Goldman Sachs has turned optimistic on Indian banking stocks, saying improving financial conditions, low earnings expectations, and attractive valuations position the sector for a strong comeback.As per ET, the firm expects the Nifty Bank index to outperform the broader market, projecting up to 30% upside for banks and non-banking financial companies (NBFCs).
Easier financial conditions to boost credit growth
Goldman Sachs expects a sharp improvement in India’s financial environment through 2025, helped by the Reserve Bank of India’s (RBI) 100-basis-point policy rate cuts, enhanced liquidity, and regulatory easing. These changes, according to Goldman Sachs, could reduce banks’ capital requirements by around 2 percentage points of total credit and lower funding costs.With asset quality stabilising, the firm projects that credit growth will pick up from the second half of FY26, aided further by new offshore borrowing norms expected in 2027.
Weak earnings expectations may lead to positive surprises
According to the ET report, Goldman Sachs highlights that market expectations for bank earnings are currently muted, setting the stage for potential upside.Earnings per share (EPS) for financials are expected to grow only 1% year-on-year, while banks may see a 3% decline, marking the weakest phase since the pandemic.Goldman Sachs believes this low bar raises the likelihood of positive surprises when results are announced, especially since recent EPS downgrades have been the steepest in five years.
Profit growth expected to rebound in FY26
Goldman Sachs forecasts a turnaround in profitability, with sentiment towards banks now at a one-year high. The report says stabilising asset quality, early signs of consumer spending recovery, and supportive regulatory measures will drive earnings growth.Consensus estimates project financial sector profits rising 15% in FY26, compared to 8% in FY25, mainly on the back of improving loan growth and easing cost pressures.
Valuations offer strong upside potential
According to ET, financial stocks are trading at appealing levels after sustained foreign investor selling of about $9 billion since last year.Domestic funds also remain under-invested. Currently, the sector trades at 17 times forward earnings, or 1.1x PEG, versus MSCI India’s 1.5x, offering a favourable risk-reward ratio.Goldman Sachs expects Nifty Bank to outperform the broader Nifty index, adding that while the index has already led by 2% in the past month, it still has 10–30% upside potential relative to past peaks.Goldman Sachs also noted that financials are trading at a 22% discount to MSCI India, making current valuations particularly attractive.
External challenges remain
Despite the positive outlook, Goldman Sachs cautioned that global headwinds — such as higher US tariffs on Indian exports and rising visa costs — could affect corporate borrowing in the short term.However, it expects growth momentum to strengthen again in 2026, supported by easing fiscal consolidation, likely moderation in tariffs, and an additional repo rate cut before year-end.(Disclaimer: Recommendations and views on the stock market and other asset classes given by experts are their own. These opinions do not represent the views of The Times of India)
