Private banks in India have de-rated over the past five years despite a supportive macroeconomic backdrop, with slower deposit growth, compression in risk spreads and a more challenging operating environment weighing on growth and returns, according to Goldman Sachs.
In its latest note on Friday, August 21, the brokerage expects these structural pressures to persist, making deeper customer wallet-share penetration, expansion into higher-margin commercial retail segments and operating leverage increasingly important for private banks to sustain profitability.
Goldman Sachs believes a sustained re-rating of private banks will depend on loan growth reviving to 1.5-2 times nominal GDP growth, alongside an improvement in profitability. ICICI Bank top pick; Kotak offers turnaround potentialGoldman Sachs favours ICICI Bank as its top pick, owing to its relatively early start to a customer-centric approach, superior organisational structure and multipurpose branch ecosystem.
The lender has just approved a $5 billion overseas borrowing limit as an enabling resolution. Goldman Sachs also sees Kotak Mahindra Bank as having the strongest turnaround potential, given its access to multiple high-margin profit pools across banking, capital markets, asset management and insurance.
HDFC Bank, meanwhile, pioneered ecosystem banking in India, according to Goldman Sachs. However, its scale limits the scope for meaningful expansion in risk spreads through changes in its loan mix. Goldman Sachs said Axis Bank is catching up in its transformation.
Shares of the bank are trading at ₹1,248.10 as of 11.26 am, down 0.23%. They have fallen about 2% year-to-date, while advancing close to 16% over the past year. Indian banking system remains well capitalisedThe assessment comes as India's banking system remains financially strong.
On August 19, RBI Deputy Governor Shirish Chandra Murmu said at the CNBC-TV18 Banking Transformation Summit that the sector has a capital-to-risk-weighted-assets ratio of 17.7%, while aggregate profit after tax has exceeded ₹4 lakh crore. Gross non-performing assets have declined to 1.8%, while stress tests indicate that the banking system is well placed to absorb adverse shocks.“Resilience, I would argue, should be built into the design of growth, not bolted on after the expansion has already happened,” Murmu said.
He also cautioned against assessing banking performance solely by balance-sheet expansion or aggregate credit growth, saying the sector should also be evaluated by whom finance reaches and how effectively banks support broader economic activity. Murmu noted that while outstanding commercial credit expanded 14% over the year, the share of fresh businesses entering the formal credit system declined from 52% in 2022-23 to 42% in 2025-26.
He said banks need to use alternative data and artificial intelligence responsibly to address information gaps and expand access to credit. Shares of ICICI Bank are trading 0.3% higher on Friday at ₹1,418.6. The stock is up 6% so far this year. Shares of HDFC Bank are trading 0.7% higher on Friday at ₹729.9.
The stock is down over 25% so far this year. Shares of Kotak Mahindra Bank are trading 1.5% higher at ₹403.2. The stock though, is down 9% on a year-to-date basis.