Archive for November 9th, 2009

ICICI, SBI write off, sell debt to reduce bad loans

By restructuring the repayment terms of prospective bad loans and writing off loans in Q3, the leading banks are putting in check their non-performing assets (NPAs).
ICICI, SBI write off, sell debt to reduce bad loans
However, State Bank of India (SBI) restructured Rs 2,832 crore loans, while ICICI Bank did so with Rs 850 crore of loans. Further, SBI wrote off Rs 900 crore of bad loans in the first half of 2009-10 while ICICI has written off Rs 600 crore in Q2.

Moreover, the level of gross NPAs depends on the amount of write-offs/upgrades of NPAs hence; the more relevant figure is the absolute level of net NPAs while SBI”s advances are growing faster than the system at 16%, but its NPAs are also growing.

Meanwhile, there is no need for concern as most loans are in the recoverable category and they stemmed from home loans, education loans and international business, which were closely related to the downturn.

In addition, the sale of bad loans also helped ICICI Bank ensure its gross NPAs were lower at Rs 9,200.89 crore at the end of Q2.

On the other hand, the bank restructured about Rs 4,800 crore of bad loans whereas in the next 2-3 quarters they should be able to clean up their balance sheet.

As for HDFC Bank, gross NPAs rose to Rs 2,025.88 crore at the end of Q2, about 20% higher than a year earlier while most of the bad loans on HDFC Bank”s books are on account of the merger of Centurion Bank.

PORTFOLIO REBALANCING TO STAY ON TRACK

Portfolio re balancing is the process of bringing the different asset classes back into appropriate proportion following a significant change in one or more.
PORTFOLIO REBALANCING TO STAY ON TRACK
Over the time, as different asset classes produce different returns, the portfolio’s asset allocation changes. To recapture the portfolio’s original risk and return characteristics, the portfolio must be rebalanced to its original asset allocation.

The primary purpose of rebalancing is to maintain a consistent risk profile. Periodic rebalancing will help to avoid counterproductive temptations in the market.

For example, in this seemingly falling market, rather than an investor

Tempted to follow the crowd, who are busy dumping popular stocks; the imbalance created by erosion of the equity component can be used to book profits on debt portion and buy into equities to bring back the allocation to the original ratio.

The balancing act

To get the entire asset classes back to their original allocation percentages would entail the following:

·Selling part of the equities and investing the proceeds into debt and cash and vis-a-versa.

·Putting in fresh one-time investments into debt and cash to raise the allocation in the portfolio.

·Start a systematic investment plan skewed towards debt and cash.

Rebalancing controls risk

The investments in a portfolio will perform according to the market. As time goes on, a portfolio’s current asset allocation can move away from an investor’s original target asset allocation.

If left un-adjusted, the portfolio could either become too risky, or too conservative.

The goal of rebalancing is to move the current asset allocation back in line to the originally planned asset allocation.

How often should one rebalance?

Though the frequency is entirely dependent on the investor, the portfolio size as well as market conditions will impact the overall returns’ expectation of the portfolio.

The main idea is that the periodic interval between successive rebalancing acts should be constant.

Some of the other factors affecting the rebalancing are:

Cost of transactions

If one decides to rebalance the portfolio once in six months, he needs to factor in short term capital gains, brokerages and entry exit loads. Hence, it is advisable to rebalance annually the long term portfolios and rebalance semi annually for the short term portfolios.

Volatility

High return volatility increases the fluctuation of the asset class weights around the target allocation and increases the risk of significant deviation from the target.

Greater volatility implies a greater need to rebalance. In the presence of time-varying volatility, rebalancing occurs more often when volatility rises.

Investors can also employ another trigger for asset rebalancing. They can decide to rebalance their portfolio, not according to time, but rather only when any asset class changes in allocation due to market movements, over a certain percentage.

Conclusion

Portfolio rebalancing is an important part of sticking to your game plan. You should look at your portfolio at least quarterly in terms of rebalancing and more frequently if you have had a significant gain or loss in any asset class.

At last asset rebalancing is a very important exercise for any disciplined investor who wishes to approach their investing in a systematic manner, while realizing their financial goals that they have set out to achieve.

Portfolio rebalancing is the process of bringing the different asset classes back into appropriate proportion following a significant change in one or more. Over the time, as different asset classes produce different returns, the portfolio’s asset allocation changes.

To recapture the portfolio’s original risk and return characteristics, the portfolio must be rebalanced to its original asset allocation.

The primary purpose of rebalancing is to maintain a consistent risk profile. Periodic rebalancing will help to avoid counterproductive temptations in the market. For example, in this seemingly falling market, rather than an investor tempted to follow the crowd, who are busy dumping popular stocks, the imbalance created by erosion of the equity component can be used to book profits on debt portion and buy into equities to bring back the allocation to the original ratio.