Indian Financial Sector's Optimistic Outlook: End of Earnings Downgrades on Horizon

Goldman Sachs reports suggest Indian financial sector's earnings downgrades may end by the first half of 2025-26. Early recovery signs in asset quality and profitability are visible. However, pressures from weak credit growth and higher credit costs persist. Overall, the sector appears to be on a recovery path with potential EPS improvements.

A new report by Goldman Sachs highlights potential shifts in the Indian financial sector, forecasting the conclusion of the prolonged phase of earnings downgrades by the first half of the financial year 2025-26. As early recovery signs surface in asset quality and profitability, optimism is building within the sector.

Despite these encouraging signs, the report warns of existing challenges that might affect earnings, including weak credit growth, a decline in net interest margins, and heightened credit costs. These factors could lead to a modest 2% cut in earnings per share for FY26 across the covered companies.

The broader outlook, however, remains positive. A projected 100 basis points cut in interest rates is expected to bolster the sector, along with improvements in operating profitability, specifically in pre-provision operating profit to return on assets metrics. Asset quality improvements in unsecured loans and a projected moderation in slippages in the second half of FY26 further contribute to an optimistic view of the sector's recovery potential.