Equity bank branch in Kibera slums in Nairobi. FILE PHOTO | DENNIS ONSONGO | NMG
Tier one banks reported a Sh55.17 billion paper loss on the market value of their bond holdings last year following a rise in global interest rates that has
resulted in a fall in the market prices of the securities.This was a significant jump from the Sh12.5 billion reported at the end of 2021, with the difference reflecting the fact that yields and prices on bonds move in opposite directions.
The fair value losses are based on the difference between the current value of the securities in the secondary market versus the acquisition cost.
They are, however, only booked on the profit and loss account if the holder sells the security.
Read: Kenyattas, Equity CEO top in Sh63bn bank dividends
Equity Group recorded the biggest paper loss at Sh29.01 billion last year, up from Sh7.09 billion in 2021, pointing to higher exposure to external bonds compared to its peers.
It was followed by Co-operative Bank at Sh8.6 billion, and KCB at Sh4.2 billion.
The devaluation of bond prices was more pronounced in the international markets such as that of the Eurobonds, where yields rose to as high as 22 percent on bonds whose coupon rates were in the single digits.
“The banks that have registered a mark-to-market (drop) are the ones that were holding Euros. As of December, the Eurobond had high yields up all the way to 17 and 18 percent,” said Equity Group chief executive officer James Mwangi on Tuesday during the lender’s full-year financial briefing.
“The prediction is that we are almost reaching the peak of inflation, so by 2024 interest rates will begin to start coming down.”
KCB and Equity have the highest holdings of bonds in the Kenyan banking sector at Sh270.7 billion and Sh219.2 billion respectively, while Co-operative Bank (Sh173.3 billion) is fourth after NCBA’s holdings worth Sh205.4 billion.
Despite the higher paper losses, the risk to the large local banks is seen as minimal due to their high liquidity and diversified sources of deposits, especially from the large pool of retail depositors.
Earlier this month, rating agency Moody’s said that while African banks have also faced erosion in the value of their bond assets due to higher interest rates or yields, their high holdings of liquid assets such as cash and deposits with central banks offer them protection against moderate deposit withdrawals.
Read: Banks tipped to be top NSE performers in 2023
This is in contrast to some of their western peers such as the collapsed US lenders Silicon Valley Bank (SBV) and Signature Bank, which collapsed on liquidity concerns partly tied to the devaluation of their bonds.
Western lenders had piled funds into bonds that had been issued at very low rates—some at negative yields— meaning that when their central banks raised rates up to almost five percent to fight inflation, their valuations were sharply eroded.
For Kenyan lenders, the rates on local bonds went up by a more modest range last year. For instance, the rise on the one-year Treasury bill rose from 9.3 percent to 10.3 percent between January and December 2022.
→ cmwaniki@ke.nationmedia.com
No comments:
Post a Comment