Indian financial sector showing signs of improved asset quality, operating profits: Report

New Delhi [India], April 10 (ANI): The prolonged phase of earnings downgrades in the Indian financial sector could come to an end by the first half of the financial year 2025-26 (1HFY26), said a report by Goldman Sachs.
The report stated that the Indian financial sector may finally be approaching a turning point, with early signs of recovery emerging in asset quality and operating profitability.
It said, "We believe our "muddle through" scenario for Indian Financials could be coming closer to an end, as we see early signs of improvement in asset quality and operating profitability".
However, the report highlighted that the recent data points indicate some pressure on earnings due to weak credit growth, a decline in net interest margins (NIMs), and higher credit costs. These factors are expected to lead to modest earnings per share (EPS) cuts--about 2 per cent on average--for the financial year 2025-26 (FY26E) across covered companies.
But the broader outlook suggests that the sector could be nearing the bottom of the current cycle.
Despite an anticipated 100 basis points of interest rate cuts, the sector is showing early signs of resilience. Improvement in operating profitability, particularly in pre-provision operating profit to return on assets (PPOP-ROA) metrics, points to a potential recovery path.
Although short-term trends may remain subdued, the bigger picture hints at a gradual turnaround.
The report mentioned that a key positive development is the visible improvement in asset quality. It said most loan segments are showing signs of stabilization, especially in unsecured loans. However, some stress remains in the business banking loan segment for non-banking financial companies (NBFCs).
"As early signs of improving asset-quality trends, visible Asset quality is nearing a turn, in our view, as early indicators (bureau data) are showing signs of stabilization in most loan segments, noticeably in the unsecured loan segment, except business-banking loans for NBFCs."
The report expects moderation in slippages, or the rate at which loans turn bad, to begin with the second half of FY26. This should help in easing credit costs over time. With these trends in place, credit-cost assumptions have also been revised downward.
Overall, while Indian financials may continue to face short-term challenges, there is increasing optimism that the worst could be behind. The light at the end of the tunnel seems to be getting brighter, with EPS cuts likely to end in the coming quarters. (ANI)