Private banks vs PSU banks: Goldman Sachs sees a major shift in the next two years

Goldman Sachs expects India’s banking sector to enter a cyclical earnings recovery, but sees a growing gap between private and state-owned lenders. While private banks could benefit from improving margins, loan growth and asset quality, PSU banks face rising credit costs, weaker non-core income and higher employee expenses.

The past three years have been challenging for Indian banks, with core pre-provision operating profit (PPoP) growth slowing amid weaker balance-sheet growth, pressure on unsecured loans and falling interest rates. However, Goldman Sachs expects the cycle to turn, forecasting core PPoP growth to accelerate into the high teens during FY27-FY29.

The brokerage expects private banks to be better placed over the next two years. Liquidity coverage ratios between private and PSU banks have largely converged, reducing one of the advantages enjoyed by state-owned lenders in recent years. Goldman Sachs also expects private banks to capture a larger share of FCNR(B) deposits, which can strengthen their liquidity position.

For private lenders, the expected recovery is also linked to better loan economics. Goldman Sachs expects incremental disbursement spreads to improve as the mix of unsecured lending normalises. At the same time, asset-quality concerns around unsecured loans have largely moved into the past, allowing credit costs to remain more benign.

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Why PSU banks could lag private lenders

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.

The brokerage expects credit costs to rise following the transition to the expected credit loss (ECL) framework, with the impact potentially more pronounced for PSU banks because of their lower starting RoA. Treasury gains and recoveries from written-off loans, which have supported earnings, are also expected to moderate.

Another pressure point is employee costs. Goldman Sachs expects the next five-year wage revision, effective November 2027, to weigh on FY28-FY29 earnings. It consequently expects PSU-bank performance to become more volatile and underperform large private banks.

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ICICI Bank and Kotak Bank

Within large private banks, ICICI Bank and Kotak Mahindra Bank are Goldman Sachs' strongest risk-reward picks. The brokerage expects core PPoP growth of 17% for ICICI Bank and 15% for Kotak Bank over FY26-FY29.

Goldman Sachs has set a target price of ₹1,935 for ICICI Bank, implying 37% upside, while its ₹509 target for Kotak Bank implies 31% upside. ICICI's thesis is built around loan growth accelerating above system growth, while Kotak is expected to benefit from continued share gains in focus segments and improving asset quality.

For investors, the key takeaway from the Goldman Sachs report is that the next phase of the banking cycle may not lift all lenders equally. Private banks appear better positioned to convert improving liquidity, margins and asset quality into earnings growth, while PSU banks could face a tougher profitability environment.

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