Kenya’s top nine listed banks have recorded Sh18 billion in paper gains from government securities held for trading purposes as bond prices begin to rise again.
The fair value gains made across nine months to September 2024, are a reversal of losses made at the same time last year, when bond prices fell as interest rates on the securities soared.
An analysis of banks fair value changes from the government securities portfolio held for sale, shows nine of Kenya’s top listed banks booked Sh18 billion in paper gains in the review period, compared to a loss of Sh45.3 billion a year earlier.
Bond prices and yields have an inverse relationship where high interest rates accompany falling prices while the vice versa sees yields falling as prices rise.
Yields on government securities began rising in June last year in tandem with the lifting of the benchmark interest rate by the Central Bank of Kenya (CBK).
Commercial banks responded to the rising interest rates by purchasing the higher yielding papers which are now sellable at a premium as domestic interest rates including the return from government securities drops.
A commercial bank which purchased February’s infrastructure bond at its par value of Sh100 for a yield of 18.4607 percent, would have sold the same paper at a premium of Sh118.21 on Wednesday last week with the paper’s implied yield falling to 13.7103 percent.
Standard Investment Bank (SIB) Research Associate Melody Ndanu who covers the banking sector says banks who purchased high yielding bonds are now taking profits by selling the same papers in a falling yield-rising price environment.
“I believe it is attributable to strategic portfolio rebalancing where the banks have locked in positions in papers with high yields and are taking advantage of market movements allowing them to gain from higher prices as yields trend lower,” she said.
Domestic interest rates have peaked since August, with CBK cuts to its benchmark rate giving impetus to the unwinding of yields on government securities.
This has further opened the window for banks to sell securities from their tradeable book at a profit.
“Expectations of further rate cuts by CBK’s monetary policy committee spells a guaranteed drop in interest rates- something banks might already be banking on to boost profits and polish their books,” added Ms Ndanu.
Banks’ preference for government securities continued through the period as the top lenders increased their total holdings of Treasuries marginally to Sh1.28 trillion from Sh1.26 trillion in the prior year.
The share of securities held for trading purposes rose by Sh20.2 billion to Sh795.2 billion in the same period.
Equity Bank Kenya held the largest share of tradable securities at Sh231.9 billion, while KCB Bank Kenya and Co-operative Bank Kenya had sellable papers worth Sh124 billion and 82.8 billion respectively, ranking second and third.
Bonds are usually issued at par value or Sh100 for every unit but the price usually varies over the tenure of the paper depending on interest rate movements driven by demand for the security from investors.
