Banks outdo hedge funds in portfolio churns

The treasury departments of banks could well outdo hedge funds in the way they churn their portfolios. They enter and exit stocks rapidly, rarely holding on to a scrip for more than four days.

The head of a domestic brokerage who has some of the largest public banks as his clients said: "They are creating a boogey about hedge funds. But if you look at the trading patterns of some of these banks, hedge funds will look like long-term investors."

A dealer at a leading brokerage pointed out: "In my experience, banks do not like to remain invested for a long time. They also do not invest too much in any one scrip as they do not like to attract attention."

Since banks have to follow the norm of not investing more than five per cent of their incremental deposits, their investments tend to be extremely short term. "Banks hold their exposure for a maximum of ten days," the dealer added.

In fact, a recent proposal by the government to raise banks' exposure in equities to 10 per cent of their incremental deposits has raised a few eyebrows in trading circles.

Sources in brokerage houses pointed out that when it came to the stock markets, both private sector banks and their public sector counterparts tended to behave in the same way.

However, public sector banks are careful to keep their exposure well below the five per cent limit at all times, while private sector banks tend to be a little more adventurous without actually overstepping the limit.

Rapid portfolio churning has become even more pronounced in the recent equity boom with investments in gilts losing their lustre. "Banks have been earning in excess of 20 per cent in the last one month," said a dealer.

According to reports, banks which have increased their activity in the stock markets recently include State Bank of India, Punjab National Bank and Union Bank of India. According to market estimates, close to Rs 3000 crore of fresh money has flown into the markets from the major banks so far.

The banks' extremely short term nature of investments is evident not only in the secondary market but also in the primary market. Banks tend to offload the shares allotted to them almost immediately on listing.