Goldman Sachs forecasts “healthy” growth in new lending at three major Indian banks over the next six months, which it says could lead to a significant upside for these stocks. The investment bank named Kotak Mahindra Bank , State Bank of India , and HDFC Bank as its “Top Buys” with the decline in profit margins across the sector expected to “bottom out” in the near future. The Wall Street bank noted that Indian bank stocks have broadly outperformed the MSCI India index over the past year, but have underperformed over the last three to six months. Goldman Sachs said that valuation multiples for Indian banks have declined the most despite earnings per share (EPS) upgrades. EPS is an important metric used by traders to gauge the value of a stock. The bank believes concerns around contracting margins and moderating loan growth drove the derating. Large-cap banks like HDFC Bank and ICICI Bank , which are also listed in the United States, have lost around a third of their valuation multiples since early 2021 despite posting double digital EPS growth rates over the same period. HDB KOTAKBANK-IN,SBIN-IN YTD mountain However, Goldman Sachs expects operating profit to bottom out in the December quarter of 2023 as margins and growth rates stabilize. “We expect margins to start bottoming out for banks over the next [two quarters] as the deposit rates are peaking (retail mostly) while lending rates have been stable at the system level, notwithstanding competitive headwinds in certain segment[s] such as in mortgages,” said Goldman Sachs analysts Rahul Jain and Hardik Shah in a research note to clients on Sept 13. The investment bank’s bullish stance is also mirrored by its outlook on India’s economy. Goldman is forecasting a real GDP growth rate of 6.5% over the next three years, which it expects will organically drive up lending at the major banks. “We also expect loan growth to remain healthy, driven by demand for commercial retail, demand for working cap loans (as commodities rally) and a gradual pick-up in demand for capex credit, which is more structural in nature, in our view,” the Goldman Sachs analysts said. Goldman’s view on the Indian banks Kotak Mahindra Bank Price target: 2,624 Indian rupees ($31.6). Upside: 49% We expect Kotak to grow its operating profit at a CAGR of 19% over FY23-26 vs HDBK/AXBK/ICBK at 16%/15%/12%. State Bank of India Price target: 748 Indian rupees. Upside: 25% SBI has been a turnaround story over the last two years with a consistent improvement in operating performance and strong asset quality trends with asset quality cycle well-handled even amid COVID-19. HDFC Bank Price target: 2,051 Indian rupees. Upside: 34% We forecast sector-leading earnings growth of 17% in FY23-26E and superior return ratios (avg. ROA/ROE at c2.1% and c16% over FY24-26E) with a high degree of earnings visibility. — CNBC’s Naman Tandon contributed to this report.