The sops given to banks, including provisions of up to 5 per cent of gross NPAs being allowed as a deduction for tax purposes, is being viewed as an attempt to get banks to come clean with their gross NPAs. This development should eventually aid in the re-rating process as the NPA issue will be tackled seriously.

So far as earnings go, there is a dual benefit from writing back investment depreciation made in the earlier three quarters to the profit-and-loss account. Second, crediting the incremental appreciation in the investment account to theP&L account. The net effect of these two accounting measures will cumulatively be Rs 150-200 crore for SBI in 1998-99, assuming that it will take advantage of additional provisions against doubtful assets. The benefit to SBI from the tax breaks received, i.e., through the amendment made to section 36(1)viia, will accrue only in the next financial year but will be substantial. A bank of SBI's size could expect to benefit by Rs 250 crore.

But, the end result for the current year will be that the profit for the last quarter will be a record one and the profit for the full year could now be lower by just 10 per cent than last year's profit of Rs 1,861 crore. The earlier estimated net profit was much less (between Rs 1,500 to Rs 1,600 crore), thus pushing up EPS estimates for the year, leading to the re-rating. In Corporation Bank's case, the benefit from writing back investment depreciation and an increase in the investment portfolio could be to the extent of Rs 10-15 crore, yielding a highest ever profit inthe current year. The bank provided for Rs 5 crore of investment depreciation during the last nine months, which will be written back. However, analysts estimate that it is quite unlikely that actual profits will exceed the projected profit of Rs 210 crore, for the full year, given that the bank management has committed to charge Rs 20 crore against NPAs on government guaranteed loans. The bank has already earned Rs 157 crore in the last nine months so far and a reasonable estimate could be a total profit of Rs 200-205 crore for the full year.

Even though bank stocks traded at the circuit filter on Wednesday, there is no underscoring the risk involved. This is because the sector's ulitmate revival will be hinged on the turnaround in the level of NPAs which is dependant on a turnaround in the economy. The current year will be a bumper one for the banking sector, but if volumes do not pick up in the next financial year, public sector banks will be hit as spreads will tighten further. This could be disastrousfor bank earnings in 1999-2000. This disaster will be compounded by the additional provisioning that will have to be made as a result of sticky government guaranteed debt, most of which are outstanding with state electricity boards.

Analysts estimate that SBI could benefit the most if there is project finance demand next year. SBI is estimated to be holding Rs 20,000 crore of incremental deposits (including RIBs) taken in the current year in short term assets (the bank has Rs 1,500 crore in CPs and the balance in short duration government securities). The spread on these assets are just one per cent at the moment. If these can be converted into longer duration assets the spreads will widen by at least two to three percentage points, which could easily add Rs 500-600 crore to pre-tax earnings. Thus, SBI will be a big beneficiary from a turnaround in project loan offtake.