Goldman Sachs is betting big on bank stocks. Here are 4 reasons why – News Air Insight

Goldman Sachs has turned bullish on Indian bank stocks, saying easing financial conditions, low earnings expectations, improving profitability, and attractive valuations set the stage for a strong rebound. The brokerage expects Nifty Bank to outperform the broader market, with banks and NBFCs offering up to 30% upside from current levels.

1. Easier financial conditions to lift credit growth

The firm sees financial conditions improving sharply in 2025, aided by the Reserve Bank of India’s 100 bps policy rate cuts, improved liquidity, and multiple regulatory relaxations. These measures are expected to lower capital requirements by around 2 percentage points of total bank credit and reduce funding costs. As asset quality stabilizes, Goldman expects credit growth to recover from the second half of FY26, further supported by easier offshore borrowing norms set to take effect in 2027.

2. Low earnings expectations set a low bar

Heading into the second-quarter results, consensus expectations are muted, with earnings per share (EPS) growth projected at just 1% year-on-year for financials and a 3% decline for banks — the weakest since the Covid pandemic. Goldman notes that this creates a low hurdle for positive surprises, as recent EPS cuts have been the steepest in five years amid concerns about slowing credit growth and asset repricing during the rate-cut cycle.

3. Profit growth likely to turn around

Goldman expects the earnings cycle to inflect from here, with sentiment towards banks now at a one-year high. As analysts look beyond the weak quarter, stabilizing asset quality, early signs of consumption revival, and regulatory easing are expected to drive profit growth. Consensus estimates point to financials’ earnings rising 15% in 2026, up from 8% in 2025, led by a recovery in bank loan growth.

4. Valuations look compelling

Financials have been under-owned and are trading at attractive levels. Domestic funds remain under-exposed, while foreign investors have sold about US$9 billion worth of holdings since last year. With financials trading at 17x forward earnings — equating to a 1.1x price-to-earnings-growth (PEG) ratio versus MSCI India’s 1.5x — the sector offers a favourable risk-reward, Goldman Sachs said in a report October 15.The brokerage sees Nifty Bank outperforming Nifty in the near term, noting that while the index has led by 2% in the past month, it still offers 10–30% upside versus prior peaks. Financials are currently trading at a 22% discount to MSCI India, a level Goldman deems attractive.

While supply conditions are improving, external challenges such as higher US tariffs on Indian exports and rising US visa costs could weigh on corporate borrowing amid persistent uncertainty. However, growth is expected to strengthen in 2026, supported by easing fiscal consolidation, a likely moderation in tariffs, and an additional repo rate cut before year-end.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)