Second, its net NPAs were anticipated for a worst-case scenario and even if it doubled to 15 per cent of its advances, theprice/book value adjusted for provisions appeared to be underpriced. while the market is relatively bullish on ICICI, it still has a singular negative outlook towards IDBI, despite the jump on Wednesday. The difference being in the perception of the management, besides the proportion of suspect assets held by it. A story very similar to IDBI's is being appended to IFCI as well, also a major gainer. The bad assets being talked of for IFCI are said to be close to 30 per cent.

Banks are another story. In general, banks trade at a higher multiple than the development financial institutions (DFIs); the reason being that their potential NPA exposure is a lot less and their nature of funding is shorter term (being working capital and gilt investment oriented) and thus more liquid. Therefore both on a multiple basis as well as on a yield basis bank stocks were more expensive than DFIs. The leading banks were the first among bank stocks to react positively, with both SBI and Corporation Bank rising to hit thecircuit breaker. Incidentally, both these stocks were the only ones that have not fallen below their issue prices or to an all time low (though Corporation Bank came close) unlike even other leading bank stocks such as the Bank of Baroda (which also reached the circuit breaker).

The stock market perception has also begun to favour HDFC Bank once again. One should recall that only recently the RBI had announced based on its audit that HDFC Bank's gross NPAs were far higher at 7.5 per cent of advances (the RBI audit was based on 1996-97 figures) than what the bank acknowledged. Market sources have said that in the current year (1998-99) the net NPA position for HDFC Bank has improved greatly as most of the provisions for its larger NPAs have already been made. In addition, until the finalisation of its new co-promoter (since Natwest Bank has opted out of the joint venture with HDFC) will make sure that the bank will actively traded. The news within banking circles is that in order to get around the takeovernorms a preferential offer might be made to a very large US based bank, which should improve the valuations of HDFC Bank.

Further, as far as the banking sector goes, the initial indications are that the financial results for the first half of the current year on a YoY basis will show a strong growth (for the top banks). However in the absence of a larger economic recovery in the second half there is no question of there being much bottomline growth in the second half, forcing banks to provide for additional and inevitable NPAs. This is bound to be the case even for the relatively stronger banks such as Corporation Bank. And lastly, the year end profits of banks is very susceptible to the movement in interest rates and if rates move up in the last quarter; there will have to be additional provisioning made for the diminution in the value in the fixed income portfolio of banks, which will certainly bring down profits in the second half. Thus the rally that will accompany the bank results in the first halfshould be used as a good exit point from certain bank stocks.