Goldman Sachs has taken a fresh look at India’s public sector banks after seven lenders reported their second-quarter business updates, with credit growth improving but still trailing the broader banking system. The brokerage expects the next phase to depend not just on loan growth, but also on deposit mobilisation, funding conditions and the ability of banks to sustain earnings as credit costs normalise.
Goldman Sachs has retained its ‘Sell’ ratings on Bank of Baroda and Punjab National Bank, even as both lenders reported year-on-year improvement in parts of their balance sheets. The brokerage has a 12-month target price of Rs 245 for Bank of Baroda and Rs 103 for Punjab National Bank. Based on the prices cited in the report, that implies about 6% upside for Bank of Baroda and about 6% downside for Punjab National Bank.
Seven public sector banks had reported their balance sheet updates when Goldman Sachs published its 5 October report. The group comprises Bank of Baroda, Punjab National Bank, Canara Bank, Union Bank of India, Bank of India, Indian Bank and UCO Bank. Together, these lenders account for about 65% of public sector bank credit, while State Bank of India is excluded because it does not report initial business updates.
Goldman Sachs said aggregate domestic credit growth for these seven banks reached about 16% year-on-year in the second quarter of FY27, compared with 15% in the previous quarter. That represents a 60-basis-point acceleration, but the broader banking system recorded a much sharper improvement, with system credit growth reaching 18% as of September 15.
The same pattern was visible in deposits. Aggregate domestic deposit growth for the seven banks improved from about 10% year-on-year in the previous quarter to around 13% in the second quarter, but remained below system deposit growth of 17%.
Goldman Sachs analysts stated that “With LCRs now largely converged between private and PSU banks, the liquidity advantage enjoyed by state-owned banks over the past few years has diminished. At the same time, stronger FCNR(B) deposit mobilisation has improved funding availability for private banks.”
Bank of Baroda’s domestic advances grew 13.5% year-on-year in the second quarter of FY27, while domestic deposits increased 17%. The bank’s retail advances remained the main source of loan growth, rising 18.7% year-on-year.
Goldman Sachs noted that the retail book continued to hold up even as non-retail loan growth moderated. Its assessment was that domestic advances had grown 14% year-on-year, compared with 16% in the previous quarter, while deposits grew 17%, broadly matching system deposit growth.
The brokerage said, “Loan growth continued to be driven by retail advances, which remained resilient at 19% YoY, broadly in line with recent quarters. In contrast, non-retail loan growth slowed meaningfully, declining from 15% YoY to 12% last qtr.”
Bank of Baroda’s domestic retail advances accounted for 27.3% of domestic advances in the second quarter, compared with 26.9% in the previous quarter. Domestic deposits rose 7.7% sequentially, taking the domestic credit-to-deposit ratio down to about 80% from 83% in the first quarter.
The deposit performance is also important in the context of funding availability. Goldman Sachs said the sharp acceleration in deposit growth was partly helped by FCNR(B) deposit inflows, citing media reports of about US$8 billion, or roughly Rs 76,000 crore.
Punjab National Bank reported domestic credit growth of 12.6% year-on-year in the second quarter of FY27, up from 12.0% in the previous quarter. Deposit growth stood at 9.4%, keeping the lender below the pace seen at Bank of Baroda and the broader banking system.
Goldman Sachs said PNB’s credit growth accelerated by 100 basis points from the previous quarter, while deposit growth remained broadly stable at 9%. The improvement pushed the bank’s credit-to-deposit ratio up by 150 basis points to 74%, marking the first meaningful acceleration after two quarters of broadly flat movement.
The combination of faster credit growth and slower deposit growth means the bank is deploying a larger portion of its funding base towards loans. That will make the pace and quality of deposit mobilisation an important part of the earnings discussion as the bank moves into the second half of FY27.
The business updates show a wide range of growth rates across the public sector banking group. UCO Bank recorded the fastest domestic credit growth at 26% year-on-year, followed by Bank of India at 17.7%, Union Bank of India at 17.4% and Canara Bank at 16.8%. Indian Bank grew 16.6%, while Bank of Baroda and Punjab National Bank were at 13.5% and 12.6%, respectively.
The aggregate figures show that public sector banks are still expanding their loan books at a healthy pace, but the distribution is uneven. At the same time, deposit growth has strengthened across the group, although it remains below the system level.
Goldman Sachs’ assessment goes beyond the reported loan numbers. The brokerage sees a change in the funding advantage that public sector banks enjoyed in earlier years as liquidity coverage ratios have converged between private and state-owned banks.
The analysts said stronger FCNR(B) deposit mobilisation has also improved funding availability for private banks. That could give private lenders more room to expand their loan books, particularly as system credit growth remains ahead of the aggregate pace reported by the seven PSU banks.
For public sector banks, the next phase therefore hinges on whether stronger deposit growth can be sustained alongside loan expansion. Bank of Baroda’s 17% domestic deposit growth provides a stronger funding base, while PNB’s 9.4% deposit growth leaves a greater gap between credit and deposit expansion.
Despite the improvement in operating metrics, Goldman Sachs has retained ‘Sell’ ratings on both Bank of Baroda and Punjab National Bank.
The brokerage said, “We remain Sell rated on Bank of Baroda and Punjab National Bank as we expect earnings growth for these banks to moderate led by normalization of credit costs and moderation in non-core earnings (treasury as well as recovery from written off accounts).”
For Bank of Baroda, Goldman Sachs has set a 12-month target price of Rs 245, based on 0.7 times 12-month forward price-to-book value on a standalone basis using a three-stage Gordon Growth Model. For Punjab National Bank, the target price is Rs 103, based on 0.6 times 12-month forward price-to-book value on a standalone basis, with a sum-of-the-parts methodology used for its housing finance subsidiary.
The second-quarter updates show that public sector banks are not standing still. Credit growth has improved, deposits have accelerated and several lenders are expanding their loan books at double-digit rates.
Goldman Sachs’ cautious stance ultimately rests on what happens to earnings beyond the headline balance-sheet growth. With credit costs expected to normalise and non-core earnings expected to moderate, the brokerage sees less room for earnings growth to accelerate even as the banks continue to expand their books.