Bank Nifty at all-time high OPTIMISM

The Bank Nifty index on Wednesday hit a new record, thanks to a rally in index heavyweights such as State Bank of India (SBI) and ICICI Bank over the past few sessions. The index closed at 21,391, up 165 points or 0.8 per cent on Wednesday. The central government's assurance that it would find a solution to non-performing loans (NPLs) trigged investor optimism in the sector. Key components like HDFC Bank, Kotak Mahindra, IndusInd Bank, and Yes Bank are trading near their lifetime highs.

Last week, Union finance minister Arun Jaitley said the Centre was working with Reserve Bank of India (RBI) to propose a new framework to tackle NPLs. In a speech, he said the problem of big NPLs was due to the top 40-50 players and the new framework would put enough pressure on borrowers to settle dues.

"Resolution of NPLs would be a great booster for Indian Gain in FY17 (%) Federal Bank PNB Bank of India Canara Bank IndusInd HDFC Bank 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.