Top tier banks cut the paper losses on the market value of their bond holdings by Sh15.9 billion last year, reflecting their reduced appetite for new lending to the government in the period.
The financial reports by the nine banks for the year ended December 2023 show that their cumulative fair value losses on government bonds stood at Sh39.27 billion at the end of December, down from Sh55.18 billion in December 2022.
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.
The bank’s holdings of government securities rose by just Sh3.23 billion to Sh1.396 trillion last year, indicating the reluctance by the lenders to take on new securities which would only deepen their fair value losses.
This was despite the government issuing mainly short-term bonds, which are usually preferred by banks.
Among the individual lenders, KCB Group held the largest volume of bonds and Treasury bills at Sh348.9 billion at the end of last year, up from Sh270.8 billion in 2022. Equity Group was second, having increased its holdings by Sh27.5 billion to Sh246.6 billion.
They were followed by NCBA, which cut its holdings by Sh1.69 billion to Sh203.4 billion, and Co-operative Bank of Kenya, whose holdings went up by Sh15.8 billion to Sh189 billion.
On the other hand, Absa Bank Kenya, DTB Group, Standard Chartered Bank Kenya (StanChart) and Stanbic followed NCBA in cutting their exposure to government debt.
Absa cut its securities by Sh38.3 billion to Sh95.2 billion, Stanbic by Sh38.1 billion to Sh45 billion, StanChart by Sh36.1 billion to Sh69.6 billion and DTB by Sh13.6 billion to Sh120.1 billion.
I&M Group raised its holdings by Sh9.98 billion to Sh78.1 billion. On the fair value end, Equity accounted for the biggest fall, trimming its bond paper losses to Sh10.2 billion from Sh29 billion in 2022.
Despite recording paper losses on bonds, 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. This means that the lenders are unlikely to resort to selling their bonds to raise cash.
They have also classified a larger portion of their bond holdings as being held to maturity, which cuts paper losses because such bonds do not need to be revalued in the balance sheet.
Commercial banks usually hold government securities in three ways; to term and at amortised cost which poses no risk of paper losses; for dealing purposes; and under fair value through other comprehensive income.
