Goldman Sachs' Top Picks: HDFC Bank, Kotak Mahindra, AU Small Finance

Goldman Sachs has released its latest insights into India's banking and financial sector, identifying top stocks that stand out despite current challenges. While the sector is facing slower credit growth and higher credit costs, recent regulatory measures and policy support could help stabilize the industry and create select investment opportunities.

India’s Banking Sector: Slower Growth but Policy Relief

According to Goldman Sachs, India's overall banking credit growth has slowed to 11% year-on-year as of February 2025, marking a 500-basis-point drop. The biggest declines have been in:

Retail unsecured loans: Down from 16% to 8%

Credit to NBFCs: Declined from 9% to 6%

However, a recent rollback of risk weights on NBFC lending is expected to provide some relief to this sector.

Top Financial Stock Picks by Goldman Sachs

Despite the sector's slowdown, Goldman Sachs remains bullish on a few key players:

HDFC Bank – Strong asset quality with early signs of growth recovery.

Kotak Mahindra Bank – Robust return on assets (ROA) despite higher credit costs and solid loan growth.

AU Small Finance Bank – Demonstrating healthy ROA and growth, even amid stress in the microfinance sector.

NBFC Stocks to Watch

Goldman Sachs has also identified promising opportunities in the non-banking financial sector (NBFCs):

📌 Cholamandalam Investment and Finance – High growth potential with an improving return profile.

📌 SBI Cards & Payment Services – Stabilizing stress ratios and rising card spending trends.

📌 Shriram Finance – Strong profitability and well-managed growth trajectory.

📌 Aavas Financiers – A niche player in affordable housing with a strong earnings outlook.

📌 L&T Finance – Successfully managing MFI stress with strong provisions and attractive valuations.

Sector Outlook: Challenges & Opportunities

Goldman Sachs describes India’s banking sector as being in a “transition phase,” dealing with moderating credit growth, rising credit costs, and margin pressures. However, the past three months have shown an improvement, thanks to several fiscal and monetary measures, including:

Liquidity injections

Income tax cuts

CRR (Cash Reserve Ratio) cuts

Risk-weight rollbacks on lending to NBFCs

Potential Risks: The BULA Bill

One key risk flagged by Goldman Sachs is the proposed Banning of Unregulated Lending Activities (BULA) Bill, which could restrict unregulated lenders and affect liquidity for certain borrowers in the short term. However, in the long run, this could benefit the formal lending sector by strengthening its position.

Overall, Goldman Sachs remains optimistic about India’s financial sector, stating that policy support and stabilizing asset quality could help drive recovery in the coming months.