Worried about outlook for PSU banking stocks after latest downgrade by Goldman Sachs on SBI: Here's what experts and analysts say

While technicals hint at a downside for the Nifty PSU Bank index, Axis Securities remains positive on SBI and Bank of Baroda.

The other negatives as listed by the brokerage are a likely decline in credit offtake together with an increase in credit costs on the back of increasing slippages in the MSME / Agri / unsecured portfolios.

Even as market experts are advocating to pocket in quality largecaps amid the strength in Indian equities, you as an investor might be worried about the fate of PSU Banking stocks after the recent downgrade by Goldman Sachs on SBI.

First why the downgrade on the country's leading state

Brokerage firm Goldman Sachs downgraded the country's biggest state-run lender as it finds the risk-reward unfavorable. The stock has been downgraded to sell from the earlier neutral rating with a reduced target of Rs 742 from the earlier pegged target at Rs 841.

The brokerage anticipates that given the headwinds, the current ROA will be difficult to sustain and is even expected to fall 1 per cent from its peak level. The other negatives as listed by the brokerage are a likely decline in credit offtake together with an increase in credit costs on the back of increasing slippages in the MSME / Agri / unsecured portfolios.

Considering all this, EPS estimate has been lowered by 3-9 per cent.

PSU Banks' fundamentals at large

Raj Gaikar, Research Analyst, SAMCO Securities on the fundamentals of the PSU Banking space said that sector is backed by strong fundamentals. However, with ongoing government capex projects funded primarily by public sector banks, the sector is expected to maintain its long-term growth trajectory.

The analyst added that over the past few years, PSU banks have delivered robust financial performance. Key metrics such as Gross Non-Performing Assets (NPA) and Net NPA have consistently improved. In addition, Net Interest Margins (NIM) have expanded. Return on Assets (ROA) and Profit After Tax (PAT) figures have also demonstrated steady growth, underlining the sector's operational resilience.

However, a key concern is the slow growth of banks' Current Account Savings Account (CASA) deposits compared to overall deposit growth. This, coupled with deposit growth lagging behind loan growth, could signal potential liquidity challenges for the banks.

Stating specifically about the SBI lender State Bank of India (SBI), the largest public sector lender, experienced a sharp 4.43 per cent decline on September 6th following a downgrade, signaling the potential for a short-term correction after a prolonged rally. Despite this, the bank’s robust fundamentals suggest it is well-positioned to regain momentum in the near future, pointed out Gaikar.

Axis Securities remains bullish on PSU Banks under its coverage

Dnyanada Vaidya, Research Analyst - BFSI, Axis Securities said, "Over the medium term, we remain positive on the PSU banks (under our coverage). Both State Bank of India and Bank of Baroda remain better placed than their private peers on the C-D Ratio, allowing these banks the scope to improve credit growth even amidst intense competition on deposits. Thus, we expect margins to find some support despite the CoF increase."

We acknowledge that the best of the credit costs cycle is behind, and credit costs will continue to normalise. However, we believe the banks remain well positioned to protect their RoA of ~1% over the medium term, backed by steady Opex ratios, which are likely to have peaked out, as the impact of wage revision has been already accounted for, he added.

Atul Parakh, CEO of Bigul said, "following the downgrade by the Goldman Sachs downgrade on SBI, the outlook for the PSU banks appears to be increasingly cautious. It reflects the concerns about the sustainability of SBI profitability as it anticipates the bank's peaked ROA. This is attributed to several headwinds, including rising credit costs and a slowdown in loan growth due to the widening gap between deposit and loan growth."

While we do not see any meaningful re-rating levers currently, we believe current valuations offer a fair upside in both SBI and Bank of Baroda, added Vaidya.

How do technicals stand for Nifty PSU Bank index?

Jigar Patel, Sr. Manager - Equity Research, Anand Rathi said, "recently, the NIFTY PSU Banks Index reached a peak near the 7080 level, indicating potential exhaustion in its upward momentum. After hitting this peak, the index experienced a sharp decline of approximately 540 points, leading to a significant 7-8 per cent drop in its overall value."

During this downturn, the index breached both the 100-day and 200-day Exponential Moving Averages (DEMA), which are crucial indicators for assessing long-term price trends. The violation of these key moving averages suggests a substantial weakening of the upward momentum, further supporting a bearish outlook for the index, he added.

Looking ahead, the next expected support level lies around 6500, which corresponds to a previous demand zone where buying interest had previously pushed the index higher. This level also aligns with the 1:1 price movement, a technical pattern that tracks equal legs in the decline, adding more significance to this support area.

On the technical front, the daily Relative Strength Index (RSI) has dropped below the 50 mark, which signals that the index is facing growing weakness. An RSI reading below 50 typically indicates that selling pressure is dominant, further supporting the likelihood of continued downside. Given these conditions, the NIFTY PSU Banks Index is expected to consolidate between the 6300-6500 range for a few sessions, potentially stabilizing before a clearer direction emerges, noted Patel.

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