Why banks are whittling down stocks of State papers held for sale

Banks are expected to continue offloading government securities held for trading purposes with interest rates. PHOTO | SHUTTERSTOCK

Banks are cutting down their holdings of government securities held for sale in a move to reduce their exposure to fair value losses resulting from falling bond prices.

An analysis of tier-one banks shows that six of the top nine lenders all trimmed their hold of tradeable Kenyan Government securities in the six months ended on June 30.

Standard Chartered Bank marked the largest reduction in the tradable securities at Sh31.4 billion ahead of Absa Bank Kenya, which cut its exposure by Sh8.9 billion.

Read: Why Treasury is hesitant to sell long-term bonds

Equity, KCB and Stanbic Bank Kenya were nevertheless outliers having increased their pool of tradeable government securities in the period.

The cut in government securities held for trade has been attributed to commercial banks seeking to avoid mark-to-market losses as interest rates on the securities lift off.

Bond prices usually have an inverse relationship to interest rates, where a pickup in yields results in discounted securities prices.

Commercial banks are usually required to make provisions for the paper losses impacting lenders’ profitability.

“Banks are trying to avoid mark to market losses from holding these papers. It also speaks to the shift in attention from the secondary bond market to the primary market as new security issuances offer comparatively higher interest rates,” noted Wesley Manambo, a research analyst at the Standard Investment Bank.

Lenders have meanwhile increased their holdings of government securities held to maturity in the backdrop of the trim in tradable bonds, another stop-gap measure to avoid paper losses.

Combined, the nine top-tier banks increased their holding of government bonds at amortised costs by Sh40.8 billion with KCB Group leading the way by increasing the long-held bonds by Sh27.6 billion.

Commercial banks usually hold government securities in three ways; to term and at amortised cost which poses no risk of paper losses, government securities held for dealing purposes and under fair value through other comprehensive income (FVOCI).

Securities held under FVOCI are usually kept for trading purposes but can also be held to term.

Banks usually require regulatory approval from the Central Bank of Kenya (CBK) before reclassifying securities held for trade as bonds held to maturity.

Despite shying away from tradable securities, commercial banks led the way in driving the recovery of secondary trading activity last month as investors dropped lower-yielding securities for bonds with higher returns.

The value of bonds traded at the Nairobi Securities Exchange (NSE) hit a two-year high in September as investors dashed to secure the high-yielding securities.

Read: CBK bans cash, cheque payment for bonds, T-bills

The rebound in secondary-bond trading activity is despite the headwinds presented by the potential for higher interest rates in future bond issuances, exposing investors to even sharper mark-to-market losses.

Banks are expected to continue offloading government securities held for trading purposes with interest rates expected to hold up for longer, denting bond prices.

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