Barclays bets on bonds trading to boost bottom line

Barclays Bank of Kenya has stepped up its Treasury bonds dealing department to quicken revenue growth, as part of a raft of new strategies that chief executive Jeremy Awori is betting on to boost the lender’s bottom line.

Kenyan banks have traditionally held a portfolio of Treasury bonds for both interest income and capital gains earned by trading in the secondary market, but Barclays has been conservative, preferring mainly to hold its government paper until maturity.

The lender’s half-year financial statements to end of June, however, showed a holding of Sh1.9 billion government securities for dealing, indicating a new direction for the Kenyan unit of the British multi-national.

“The bank did not hold (bonds) for dealing in the past but it represents an opportunity which we considered, we are not overly exposed,” said Mr Awori in an interview.

The bank recorded Sh216 million in “other income” – as per the June financial report, a line generally used to capture gains made from bonds trading — compared to Sh67 million in a similar period last year.

Barclays Kenya has in the past classified all its bonds as “available for sale” ensuring that periodical changes in their valuation did not impact its profit and loss account, like has been the case with its peers.

Dealing in bonds provides an opportunity to rake in huge capital gains associated with downward movement of interest rates, but exposes the lenders to losses whenever interest rates move upwards.

The gains or losses are only realised if the securities are sold, but they impact on the books each reporting period as they have to be factored in the lenders’ income statements.

Valuation changes for Treasury bonds that are marked as available for sale do not affect the profitability of a bank but its balance sheet position.

Banks enjoyed huge profit growths in 2008, 2009 and 2010 due to their active dealing in the secondary bonds market, increasing staff in their treasury departments and holding longer tenure instruments.

In 2011 most of them were caught out by a sudden rise in interest rates, leaving them staring at huge book losses. However, majority of them re-classified their bond portfolios to avoid reporting losses by taking advantage of loopholes in accounting rules, as was reported in a research report by Citi dated July 2012.

The integration of South Africa’s ABSA into the Barclays family has also boosted the bonds trading department.

“It brings expertise at a local level and you need systems, which we now have, allowing for marking to market as is required by the accounting policies,” said Mr Awori.

Analyst said that it was hard to predict the impact the new move will have on the lender’s performance as it depended on the tenure of the securities it categorised as held for dealing.

“It is difficult to deduce the impact it would have. If they are short-term they would not have a prolonged impact on the profit and loss account,” said the head of research at Standard Investment Bank Francis Mwangi.

Interest rates have been volatile this year, leading to banks declaring valuation losses in the first quarter before reverting to profits at the half-year mark.

Apart from risking it in the bonds market to grow business the bank is also seeking to boost its lending by waiving the loan insurance cost on all its salary based advances.

Barclays’ loan book shrunk by Sh1.2 billion in the first six months of the year. It said the waiver translates to a 1.5 per cent reduction on the customers’ interest rate charges.

The insurance provides debt protection cover which cushions the customer and their family in the event of death or permanent disability by settling the balance of the loan.

Barclays is also giving free Samsung Galaxy tablet, Lenovo Smart tab or an iPad Mini for every new loan above Sh500,000.

The bank’s loan and deposit base has stagnated over time, forcing it to rely on cost cutting to grow profits.

In the first half of the year the bank reported a 12.5 per cent drop in after tax profit to Sh3.7 billion following a Sh788 million one-off expense associated with staff restructuring.