Goldman Sachs is betting big on bank shares. Here are 4 reasons why

Goldman Sachs has turned bullish on Indian banking stocks, saying easing financial conditions, low earnings expectations, improving profitability and attractive valuations are paving the way for a strong recovery. 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 stimulate credit growth

The company sees financial conditions improving sharply in 2025, helped by the Reserve Bank of India’s 100 basis point policy rate cuts, improved liquidity and multiple regulatory relaxations. These measures are expected to reduce capital requirements by approximately 2 percentage points of total bank credit and reduce financing costs. With asset quality stabilizing, Goldman expects credit growth to recover from the second half of FY26, further supported by simpler offshore lending standards that will come into effect in 2027.

2. Low profit expectations set the bar low

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

3. Earnings growth is likely to reverse

Goldman expects the earnings cycle to reverse from here, with sentiment toward banks now at a one-year high. As analysts look beyond the weak quarter, stabilizing asset quality, early signs of a consumption rebound and easing of regulations are expected to boost earnings growth. Consensus estimates suggest financial sector profits will rise 15% in 2026, up from 8% in 2025, driven by a recovery in bank loan growth.

4. Valuations look convincing

Financials are undersupplied and trading at attractive levels. Domestic funds remain underexposed, while foreign investors have sold around $9 billion worth of investments since last year. With financials trading at 17x forward earnings — which equates to a price-to-earnings growth (PEG) ratio of 1.1x versus MSCI India’s 1.5x — the sector offers a favorable risk-reward ratio, Goldman Sachs said in an Oct. 15 report. The brokerage sees Nifty Bank outperforming Nifty in the near term, noting that while the index has led 2% in the past month, it is still 10-30% upside versus previous peaks. Financials are currently trading at a 22% discount to MSCI India, a level Goldman considers attractive.

As supply conditions improve, external challenges such as higher US tariffs on Indian exports and rising US visa costs could weigh on corporate lending amid continued uncertainty. However, growth is expected to pick up in 2026, supported by easing fiscal consolidation, a likely moderation in rates and an additional cut in the repo rate before the end of the year.

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