Private Banks Poised for Growth as Goldman Sachs Sees Shift in Banking Sector

Goldman Sachs has published a report that highlights a significant shift in the banking sector over the next two years. The brokerage expects private banks to outperform state-owned lenders, with liquidity coverage ratios between the two converging. This convergence reduces one of the advantages enjoyed by PSU banks in recent years.

According to Goldman Sachs, private banks are expected to capture a larger share of FCNR(B) deposits, which will strengthen their liquidity position. Additionally, the brokerage expects incremental disbursement spreads to improve as the mix of unsecured lending normalises. Asset-quality concerns around unsecured loans have largely moved into the past, allowing credit costs to remain more benign.

The outlook is less favourable for state-owned banks, excluding SBI. Goldman Sachs notes that much of the improvement in PSU banks' return on assets in recent years came from lower credit costs, while core PPoP-to-assets remained broadly flat despite higher loan-to-deposit ratios and a shift towards retail and SME lending.

Goldman Sachs expects credit costs to rise following the transition to the expected credit loss (ECL) framework, with the impact potentially more pronounced for PSU banks due to their lower starting RoA. Treasury gains and recoveries from written-off loans, which have supported earnings, are also expected to moderate. Employee costs will be another pressure point, as Goldman Sachs expects the next five-year wage revision to weigh on FY28-FY29 earnings.