Goldman Sachs has recently downgraded the State Bank of India (SBI), citing an increasingly unfavorable risk-reward profile due to mounting challenges in maintaining its Return on Assets (RoA). The brokerage has revised its price target for SBI from ₹841 to ₹742, signaling a potential decline of 10% based on Thursday’s closing price. This downgrade reflects Goldman Sachs’ broader concerns about the bank’s financial outlook and future performance.
Goldman Sachs’ Assessment of SBI’s Financial Challenges
Goldman Sachs forecasts several significant headwinds for SBI, which could adversely affect its financial stability and growth prospects. The brokerage points to a peak in RoA, which currently exceeds 1%, and anticipates a decline to below 1% by the financial year 2026. This decline is expected as the bank encounters challenges in sustaining its RoA amidst a more difficult economic environment.
Additionally, Goldman Sachs predicts a potential de-rating of SBI’s valuation, reflecting concerns about slower loan growth in comparison to deposit growth. This slower growth is likely due to a widening gap between the rate at which loans are growing and the rate at which deposits are increasing. Furthermore, rising credit costs are expected as SBI faces increased slippages in its portfolios, including those related to Micro, Small, and Medium Enterprises (MSMEs), agriculture, and unsecured loans.
In response to these anticipated challenges, Goldman Sachs has adjusted its Earnings Per Share (EPS) estimates for SBI for the financial years 2025 to 2027. The revised estimates reflect a reduction of 3% to 9%. The brokerage has also lowered its target multiple from 1.2x to 1x, indicating a more conservative outlook on the bank’s financial performance.
Broader Financial Sector Trends and Goldman Sachs’ Recommendations
Goldman Sachs highlights that the broader financial sector is experiencing a shift away from the “Goldilocks” period of strong growth and clear profitability. This shift is attributed to several factors, including rising consumer leverage and the moderation of RoA. The firm has noted that alternative investments, such as stock market opportunities and government savings schemes like Public Provident Fund (PPF) and small savings, are creating headwinds for deposit growth. These factors contribute to the need for banks to offer more attractive deposit rates to remain competitive.
Goldman Sachs has adjusted its earnings estimates for banks across its coverage, reducing forecasts by 5% for FY25 and 2% for FY26. This adjustment underscores the end of the favorable financial conditions that had previously supported robust growth and profitability in the sector. The brokerage’s concerns extend to consumer leverage, which is rising, particularly in unsecured lending, potentially leading to asset quality issues.
Operating costs for banks are also under pressure due to elevated wage inflation and the need to expand distribution networks to support future deposit growth. Goldman Sachs expects that RoA will continue to moderate due to ongoing margin pressures extending into FY25. The brokerage also anticipates slower loan growth and stretched loan-deposit ratios, which will require banks to address balance sheet mix issues and build capacity to maintain profitability.
Despite these challenges, Goldman Sachs believes that banking sector valuations remain relatively comfortable. Private banks are valued at 1.8 times FY25 book value, while PSU SBI is valued at 1.1 times. For non-banking financial companies (NBFCs), forward price-to-book ratios range from 1 to 5 times.
Goldman Sachs remains selective in its recommendations. The brokerage maintains a ‘Buy’ rating on several private sector banks, including HDFC Bank, Kotak Mahindra Bank, Axis Bank, IndusInd Bank, and Bandhan Bank. While Goldman Sachs has downgraded SBI to a neutral rating, it notes that potential sector reforms by the Modi government—such as reducing ownership levels below 50%—could positively impact SBI and attract passive fund flows.
In summary, Goldman Sachs’ downgrade of SBI reflects a cautious outlook on the bank’s ability to sustain its RoA and navigate the evolving financial landscape. The challenges highlighted by Goldman Sachs underscore the broader trends affecting the financial sector, including increased competition, rising consumer leverage, and moderating growth prospects.
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