Goldman Sachs downgrades SBI, ICICI Bank and Yes Bank

- The golden age of banks is over, liquidity must be increased

- Markets move ahead of central banks in anticipation of policy continuity

- Shaktikanta Das cautioned the policy makers against any measures which would prove counterproductive to the success achieved so far.

A note in the minutes of the MPC meeting that Das had warned against any countermeasures

Global brokerage firm Goldman Sachs has downgraded shares of State Bank of India, ICICI Bank and Yes Bank. The brokerage house says the period of strong growth and good profitability is over for the financial sector for the foreseeable future. Now adverse conditions are increasing for India's financial sector.

Key challenges include increasing pressure on fund expenditure due to structural funding challenges and concerns about rising consumer leverage. This can lead to asset quality issues and increase credit costs in case of unsecured lending. Banks may feel pressure on their operating costs.

Domestic banks have recorded impressive return on assets expansion from FY2020 to the third quarter of 2023-24. Now, the brokerage house believes that the return on assets will decline from upper levels to moderate levels due to continued pressure on margins and further pressure may arise in the year 2025.

As the credit-deposit ratio rises, credit growth will slow and the sector will have to mix its balance-sheet. However, the brokerage house said that an earlier-than-expected cut in policy rates would ease liquidity concerns in the system or any RBI move to provide liquidity through CRR/SLS would help deposit growth and would bode well for all private companies.

Goldman Sachs has downgraded the ratings of State Bank of India and ICICA Bank. At the same time has given sell advice on Yes Bank and IDFC Bank. Apart from this, Goldman Sachs downgraded SBI and ICICI Bank to 'Neutral' from 'Buy'.

According to the global brokerage firm, banks may face several hurdles and will need to offer attractive rates to make bank deposits attractive to the system.

The firm says the valuation of the banking sector is at a comfortable level with a total of 1.8 times for private banks based on FY 2015 PB. Forward PB for NBFC is in the range of 1-5 times and for PSU SBI it is 1.1 times for standalone unit. Goldman has cut earnings estimates for banks in coverage by 5 percent for fiscal 2025 and 2 percent for fiscal 2026.

Officials of the Federal Open Market Committee (FOMC) of the American Federal Reserve expressed the opinion that there are risks against an early reduction in interest rates. It is seen from the issued minutes of the meeting that the decision to start reducing the interest rate will be considered hasty in the January 30-31 meeting of the Federal Reserve.

Officials remained concerned about the risk of inflation. Some officials also expressed concern that inflation's march towards the two percent level would stall.

Officials agreed with the argument that interest rate levels were high but also balked at cutting them because they were concerned that a cut in interest rates would push inflation higher again.

The meeting's tone appears to be that interest rates should not be cut until there is clear certainty that inflation is moving very firmly towards the two percent level.

At the January meeting, officials voted in favor of keeping interest rates in the range of 5.25 percent to 5.50 percent. He has also kept open the option of cutting interest rates at the end of the current year if inflation continues to decline.

In the Reserve Bank's Monetary Policy Committee (MPC) meeting held in the first week of this month, Governor Shaktikanta Das cautioned policymakers against any steps that could prove counterproductive to the success achieved so far, while committee member Jayant Verma said the MPC is serious about achieving growth and inflation targets. It was seen from the issued minutes of the meeting that the necessity of providing signal was emphasized.

Explaining the rationale behind the decision to keep the repo rate, Das said that with markets leading central banks on expectations of policy continuity, any premature move would wash away the gains made so far.

Price and financial stability are essential to sustain a long period of high growth rates.

The current policy target is to bring inflation down to four per cent in view of economic growth, Das added.

However, Verma opined at the meeting that there is room to ease monetary policy without risking inflation. In this meeting, Verma favored reducing the repo rate by 25 basis points.