Indian banks are approaching a cyclical turning point, with core pre-provision operating profit (PPoP) growth projected to accelerate to around 17.5% annually between FY26 and FY29, according to Goldman Sachs, ANI reported.

The expected recovery marks a significant shift from the subdued earnings growth seen in recent years. The investment bank expects the improvement to be driven by loan growth of about 14%, a 10-basis-point recovery in net interest margins (NIMs) from their projected FY27 trough and relatively benign asset quality, despite near-term macroeconomic and geopolitical risks.

The investment bank said early indicators point to an improvement in operating conditions for the financial sector.

“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,” Goldman Sachs said.

The report also argued that many of the sector's structural challenges are already reflected in current valuations. Private-sector bank valuations have fallen to levels close to 15-year lows, below those seen during the Covid-19 pandemic, and now appear attractive relative to other Asian banking markets.

The investment bank said valuations had already factored in structural pressures including intense competition for deposits, slower growth in low-cost deposits, narrowing risk spreads and a more challenging operating environment.

The projected recovery follows three years of muted core earnings growth and repeated downward revisions to forecasts. Between FY24 and FY26, core PPoP grew at a compound annual rate of 9% for private banks and 5% for state-owned banks.

The investment bank attributed the earnings downgrades to several factors, including weaker balance-sheet growth amid a challenging macroeconomic environment, asset-quality stress in private banks' unsecured lending portfolios, and declining interest rates combined with intense competition that constrained margins.

However, Goldman Sachs flagged several risks to its outlook.

Loan growth could undershoot expectations if competitive pressures intensify or the recovery in retail credit demand proves slower than anticipated. Asset-quality deterioration in the micro, small and medium-sized enterprise (MSME) segment could also push up credit costs.

Margins remain another key risk, particularly if lending spreads fail to recover in line with changes in the interest-rate cycle.