"Resolution of NPLs would be a great booster for Indian banks, especially the public sector banks, as they will be able to unlock the value of these bad loans (NPLs). This could lead to a re-rating of some banking stocks," said Deven Choksey, managing director, KR Choksey Investment Managers.
The current financial year has been positive for banking stocks as the banking index clearly outperformed the benchmarks. The Bank Nifty has gone up 35.7 per cent during the financial year against 16.5 per cent gained by the benchmark Sensex. Shares of Federal Bank have soared 97.3 per cent during FY17, making it the best performer in the banking universe. Shares of Bank of India, Punjab National Bank, and Canara Bank have posted 80 per cent, 74 per cent, and 66 per cent gains, respectively. Shares of SBI, India's largest public sector lender, have gained 48 per cent during the period while HDFC Bank's shares went up 35 per cent.
According to Japanese brokerage Nomura, FY17 saw stability in loan quality of the banking sector. It said the situation is expected to improve further during the next year and markets have already factored a part of it in the prices now.
"While valuations for the banking sector are demanding now, in the context of overall slow loan growth, companies with better growth profile will continue to command premium valuations," said Adarsh Parasrampuria, analyst at Nomura.
Market participants say near-term to medium-term prospects for banking stocks look positive.
While private lenders have healthier books and will clock decent loan growth, public sector banks are expected to benefit from the new framework to resolve NPLs and from mergers of state-run banks.