The country's largest lender, State Bank of India [Get Quote], is expected to report a healthier bottom line in the second quarter, thanks to writeback of provisions on the bond portfolio.

Based on the current bond prices, SBI is expected to write back Rs 700-800 crore (Rs 7 to Rs 8 billion) of provisions. Yields on government bonds have softened in the second quarter.

This is in contrast to the Rs 1,656 crore (Rs 16.56 billion) mark-to-market provisions the bank made during April-June this year as yields went up 73 basis points at the close of the quarter.

The final write-back figure will depend on how bond prices move over the next fortnight.

Analysts said that a dip in yields and the consequent write-back of provisions is one of the major factors that are helping public sector bank stocks rally despite the global financial crisis.

SBI's shares closed 2.14 per cent higher at Rs 1,561.35 on the Bombay Stock Exchange.

The problem was accentuated for SBI as it had to provide nearly Rs 1,000 crore (Rs 10 billion) for erosion in the value of special bonds it received from the Centre as its share of subscription for a rights issue in March 2008.

Compared to the yield of 8.66 per cent on June 30, 2008, the yield on 10-year paper was 8.31 per cent on Thursday. This will help banks report healthier numbers despite a slower growth in income.

On March 31, the yield was 7.93 per cent. During the first quarter, SBI reported a 15 per cent rise in its net profit to Rs 1,640.79 crore (Rs 16.4 billion).

During the July-September 2008, the profit rose 86 per cent to Rs 2204.56 crore (Rs 22.04 billion).

SBI has the largest bonds portfolio and is estimated to be around Rs 1,80,000 crore (Rs 1,800 billion) at present.

SBI executives have maintained that by raising lending rates twice in the second quarter, they have managed to protect the net interest margin, which was estimated at 3.03 per cent at the end of June 2008.

The gain from this is, however, still unclear as borrowing costs have also gone up, especially on term deposits.

With banks facing higher delinquency levels due to a rise in interest rates and a slowdown in economic activity, the provisions for sticky assets may go up, executives said.

But they appeared confident that the write-back will make up for some of the additional provisioning.