Banks record half year bond losses on high T-bill rates

Money Markets

Data from the Central Bank of Kenya shows the 91-day Treasury bill rate jumped to 11.4 per cent toward end of June from 9.2 per cent. PHOTO | FILE 

By GEORGE NGIGI, gngigi@ke.nationmedia.com

In Summary

• Income of five large banks was reduced by Sh1bn owing to the inverse relation of interest rates and the value of bonds in the books.
• The situation is expected to reverse in the second half as rates fall.
• CBK data shows that the indicative 91-day Treasury bill rate jumped to 11.4 per cent toward the end of June from 9.2 per cent two weeks earlier.

A spike in State borrowing and rates on government securities in June pushed commercial banks to half-year bond losses, eating significantly into shareholders’ wealth.

The income of five large banks was reduced by Sh1 billion owing to the inverse relation of interest rates and the value of bonds in the books. The situation is expected to reverse in the second half as rates fall.

Data from the Central Bank of Kenya shows that the indicative 91-day Treasury bill rate jumped to 11.4 per cent toward the end of June from 9.2 per cent two weeks earlier.

Standard Chartered Bank captured unrealised loss of Sh361 million under “other comprehensive income” compared to a profit of Sh308 million in March relating to bonds worth Sh51 billion.

CFC Stanbic recorded revaluation losses of Sh341 million down from Sh137 million gain three months earlier.

The rise in market rates means banks that were holding older bonds yielding lower returns could only sell them to new investors at a lower price or at a loss as the entrants could get better return by buying bonds available in the primary market.

“In June the government issued the supplementary budget and it had to borrow more from the market than targeted; in trying to meet the demand it had to raise interest rates. Banks had to mark to market as at end of June,” said head of fixed income at Kestrel Capital Alex Muiruri.

The Central Bank requires banks to disclose the profits or losses they would make if they decided to sell Treasury bonds in their books that can be traded in the secondary market.

Though the disclosure does not affect the banks’ bottom line as the securities are not sold to actualise the loss or gain, it cuts back shareholders’ funds when booked in the balance sheet and the lenders’ comprehensive income, which determines dividend issuance.

The comprehensive disclosure followed claims that banks were manipulating bond portfolios to overstate their profit position.

When banks buy Treasury bonds they have the option of categorising them as held to maturity –where they will not be affected by interest movements; available for sale, whose revaluation impacts the balance sheet; and for trading, whose values affect the profit and loss account of the lender.

Citi research estimated that banks overstated their profits by 23 per cent in 2011 due to the unprofessional reclassification of bonds, allowing the banks to hide the drop in values in the shareholders’ funds.

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If the losses were captured in the profit and loss accounts they would have been more noticeable likely affecting the lenders’ share prices.

The banks also reported growth in “other income”, which mainly relates to capital gains recovered from the sale of bonds.