Bank losses on bond holdings surge to Sh66bn


The Central Bank of Kenya in Nairobi. FILE PHOTO | NMG

Local banks’ paper losses from holding government bonds shot up more than five times last year to Sh66.23 billion as the lenders took a hit from rising interest rates in 2022.

Data from the Central Bank of Kenya (CBK) shows the mark-to-market losses from Kenyan government securities held for trading purposes soared from Sh12.1 billion in 2021.

Interest rates on various fixed-income assets saw a general rise last year reflecting CBK’s monetary policy stance and liquidity conditions in the market.

The Monetary Policy Committee, for instance, raised the benchmark lending rate (Central Bank Rate) three times from May 2022, leaving the rate at 8.75 percent in December.

Banks subsequently saw their unrealised losses from holding government securities for trade rest higher as the prices of bonds fell in tandem with rising interest rates.

Bonds prices usually have an inverse relationship to interest rates implying losses for the lenders when interest rates rise.

Tier I banks booked the bulk of paper losses at Sh55.17 billion to mirror their dominance in the government securities trade.

Equity Group posted the biggest paper loss at Sh29.01 billion followed by Co-operative Bank and KCB at Sh8.6 billion and Sh4.2 billion, respectively.

During the year, interest rates on government securities increased with the 91-day Treasury bill rate for instance averaging 8.17 percent in 2022 compared to 6.96 percent at the end of 2021.

The 182-day Treasury bill meanwhile averaged 8.98 percent from 7.57 percent previously.

Average lending rates were also on the rise as the mean commercial bank lending rate reached 12.34 percent from 12.08 percent while the weighted average interbank interest rate increased to 4.9 percent from 4.71 percent.

Flanked by improved margins from the rebound of private sector lending, banks have begun to reclassify their asset portfolio to move their investments away from government paper which has served to cushion further losses from trading government securities.

Banks’ investments in government securities retreated by 1.2 percent last year to Sh1.737 trillion with bonds available for sale declining by three percent to Sh892.8 billion from Sh920.8 billion in 2021.

Investment in the securities held to maturity bucked the trend to rise by a marginal 0.8 percent to Sh844.5 billion from Sh837.9 billion.

In contrast, net loans and advances to customers rose by 15 percent last year to hit Sh3.3 trillion from Sh2.9 trillion in 2021, helping push the banking sector’s total assets to Sh6.5 trillion.

Interest rates have continued to rise this year, driving down interest by investors in taking up government paper at bond auctions as bidders demand a higher risk-adjusted return to cushion against rising inflation and the general interest rates rise.

The apathy on bonds has dampened government revenue mobilization from domestic borrowing leading to the recent sovereign rating downgrades.

Earlier this month, Moody’s downgraded Kenya’s foreign currency issuer ratings from B2 to B3 citing in part, deteriorating domestic funding conditions.

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