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The East African : Oct 31st 2015
MONEY AND EQUITY MARKETS OCTOBER 31 - NOVEMBER 6, 2015 POTENTIAL LOSSES By JAMES ANYANZWA The EastAfrican K enya’s top banks are staring at potential losses of more than Ksh300 billion ($2.9 billion) on their bond investments as interest rates soar. High interest rates have led to a drop in value of bonds held by banks, impacting negatively on profit margins, reducing returns for shareholders and impairing capital adequacy ratios of the lenders. The high rates have left big lenders holding worthless government paper on their books pondering how to manage their weakening cash reserve positions. According to George Bodo, the head of banking research at Ecobank Capital Ltd, the value of bonds available for sale (AFS) accounts for 62 per cent of the financial investments among the tier 1 (big) banks, 42 per cent for tier 2 (medium) banks and 7 per cent for tier 3 (small) banks. “This is where the impact will be felt. Banks will likely face significant revaluation losses in Quarter Three (JulySeptember),” said Mr Bodo. “Already Equity Bank has seen its revaluation losses surge by 104 per cent on quarter-onquarter basis.” KCB released its Q3 results on Thursday, announcing a loss of Ksh2.22 billion ($21.44 million) on its available for sale bond portfolio during the nine months to September 30, compared witha profit of Ksh405.72 million ($3.91 million) in the same period last year. These losses, however, are merely book losses and are realisable only upon the sale of the asset. Standard Chartered, Barclays, CfCStanbic, Co-op Bank, I&M, Diamond Trust Bank, NIC and Commercial Bank of Africa have not yet released their third quarter results. Interest rates have more than doubled since the beginning of the year, peaking in September and October with the Central Bank pursuing a tight monetary policy stance to control inflation and stabilise the shilling. The government has now abandoned a plan to issue a Ksh5 billion ($48.35 million) M-Akiba bond targeted at small and retail investors that was to be traded through mobile phones. The bond was supposed to be sold in October. The 91-day Treasury bill rate increased from 8.6 per cent in January to a high of 22.6 per cent between September and October. The rates on the 182day Treasury bill increased from 10.2 per cent to 21.6 per cent; Soaring interest rates hit Kenya’s bonds market Big lende≥s have been left holding wo≥thless gove≥nment pape≥ on thei≥ books 53 Data from the unaudited financial statements for the six months to June 30 shows that Kenya’s top banks in terms of profitability hold bonds worth Ksh303.29 billion ($2.93 billion) available for sale $2.93b rates on the 364-day Treasury bill jumped from 10.7 per cent to 21.5 per cent in the same period. Interbank rates — the rate at which banks borrow from each other overnight — surged from 7.1 per cent in January to 25.8 per cent between September and October. Interest rates on the 91-day Treasury bill in Kenya stand at 18.6 per cent, in Uganda at 18.3 per cent, Tanzania at 8.3 per cent and Rwanda at 4.3 per cent. Market analysts say that if the rise in interest rates persists, Kenyan lenders could seek additional capital injection either through rights issues or by taking on strategic partners in order to enhance their liquidity positions and preserve statutory capital and liquidity ratios. “The high interest rates have killed the bond market; there is an inverse relationship between bond prices and market interest rates. So, expect banks to book losses in their books which will be realised at the end of the year, and profit margins to narrow,” STABILISE Addressing members of the Parliamentary Committee on the Budget on Thursday, Treasury Cabinet Secretary Henry Rotich said inflation and other factors would ensure that interest rates come down. said Solomon Alubala, head of treasury at the National Bank of Kenya. Data from the unaudited financial statements for the six months to June 30 shows that Kenya’s top banks in terms of profitability hold bonds worth Ksh303.29 billion ($2.93 billion) available for sale, meaning that these debt instruments have to be recorded in the profit and loss account at their current market value. “Banks carry ‘mark-to-market’ bonds on their books; meaning that they carry bonds at current market prices, not at the prices at which they bought them,” said investment banker John Ngumi. “Taking these two together, the recent interest rate increases we have had will have had the effect of lowering the values of bonds, so banks will take a loss through their profit and loss accounts,” he added. The CEO of the Nairobi Securities Exchange, Geoffrey Odundo, said investors now prefer short-term government securities such as Treasury bills, whose returns are attractive, instead of locking their capital in long-term bonds. “We expect activity on the short term end of the yield curve, as the ‘high interest environment,’ as you call it, may be a short-term issue,” Mr. Odundo told The EastAfrican. It is projected that short-term rates will remain elevated until the end of the year. Kenya’s commercial banks control Ksh1.1 trillion, ($10.63 billion) of the Ksh 2.2 trillion ($21.27 billion) worth of bonds listed on the NSE. Pension and trust funds hold 30 per cent (Ksh660 billion, $6.38 billion), insurance companies (10 per cent, Ksh220 billion,$2.12 billion), cooperatives five per cent (Ksh110 billion,$1.06 billion) and retail investors five per cent (Ksh110 billion, $1.06 billion). The tenure of bonds on the NSE ranges from one to 30 years. The 30-year bond was issued in 2011.
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