New Delhi [India], August 22 : Indian banks are approaching a cyclical inflection point, with core Pre-Provision Operating Profit (PPoP) growth expected to accelerate to approximately 17 per cent year-on-year over FY26-FY29E, according to a report by Goldman Sachs.
The anticipated expansion represents a sharp reversal from the moderate earnings observed over the past few years. The projection is underpinned by steady loan growth of around 14 per cent, a 10 basis points recovery in net interest margins (NIM) from an FY27 trough, and benign asset quality, despite near-term macroeconomic and geopolitical uncertainties.
According to the Goldman Sachs report, the financial sector is showing initial signs of operational recovery.
"Our proprietary GS India Banks Leading Indicator points to a gradual improvement in the sector, underpinned by healthy GDP growth, improved liquidity from RBI measures, and easier funding conditions," the report stated.
The report highlighted that structural headwinds across the sector appear fully factored into current market multiples. Private bank valuations have dropped near 15-year lows, falling below levels seen during the COVID-19 pandemic, and currently "screen as attractive compared to regional Asian peers."
"Current valuations already capture this decade's structural headwinds, including intense deposit competition, slowing low-cost deposit growth, compressing risk spreads, and a tighter operating environment," the report noted.
The turnaround follows a three-year period marked by consistent downgrades in core earnings. Between FY24 and FY26, core PPoP recorded a compound annual growth rate (CAGR) of 9 per cent for private banks and 5 per cent for state-owned enterprises (SoE) banks.
"Indeed, we have seen consistent downgrades to core earnings across the sector, driven by: a) a challenging macro environment leading to slower balance-sheet growth; b) asset-quality pressures for private banks in the unsecured lending segment; and c) falling interest rates and elevated competitive intensity weighing on margin progression," the report added.
Goldman Sachs outlined several key risks that could alter these projections. Loan growth assumptions face pressure if competitive intensity exceeds expectations or if the recovery in retail credit demand remains slower than anticipated.
In addition, deteriorating asset quality within the micro, small, and medium enterprise (MSME) segment presents the potential for higher credit costs, while margins could face sustained pressure if loan spreads fail to improve alongside shifts in the interest rate cycle.