Kenya: Bank's exposure on sovereign debt rise significantly

In Kenya, local banks have experienced a substantial increase in paper losses from holding government bonds, reaching Sh66.23 billion in 2022 due to rising interest rates. Sunil Sanger, the Managing Director of Orion Advisory Services Ltd, shed light on the challenges facing banks in the current economic climate. The spike in bond yields has been a prevalent trend since the second half of 2021, with a significant acceleration in 2022. This surge in yields has resulted in substantial mark-to-market losses for banks, affecting their full-year accounts. Notably, local banks in Kenya have collectively lost approximately 66 billion Kenyan shillings in government bonds over the past year, marking a significant increase over the last five years. Sanger attributes these losses primarily to the rising interest rates that have impacted the bond market. Equity Bank emerged as the institution with the highest mark-to-market loss, accounting for more than 40% of the industry's total losses at 29 billion shillings. Cooperative Bank followed with 8.6 billion shillings in losses, and KCB recorded 4.2 billion in losses. The tier one banks, including Equity Bank, are among the most affected due to the size of their asset portfolios. As banks grapple with these substantial losses, there are concerns about the future of the bond markets and the impact on government revenue mobilization. Despite the negative outlook in the bond markets, Sanger suggests that banks may not have the luxury of completely divesting from government securities due to limited alternative options. While a marginal shift away from long-term treasury bonds is expected, government securities remain a vital component of financial institutions' portfolios. Looking ahead, Sanger anticipates a resurgence in treasury bills as a result of the shifting dynamics in government borrowing. Treasury bills are likely to witness increased issuance compared to the recent trend, signaling a potential correction in the government debt composition. Additionally, there is a projection of shorter-term treasury bond issuances, with a decreased focus on longer-term bonds. Although concerns about thinning liquidity persist, the recent success of the Central Bank of Kenya's three-year bond sale, which slightly exceeded the target by raising 10.6 billion shillings, offers a glimmer of hope for investors. The over-subscription of the bond sale indicates continued interest from local investors, with foreign investors scaling back their exposure in the Kenyan market. Despite the challenges faced by banks, the resilience of local investors in participating in bond sales signals confidence and stability in the market.