Banks get capital lift from rise in valuation of bonds

Commercial banks have booked big gains in their balance sheets following appreciation in value of their Treasury bond holdings, helping to boost their capitalisation as reflected in half-year results.

The drop in interest rates in the three months between June and March has boosted valuation of Treasury bonds owing to the inverse relationship between the pricing of the securities and their yields.

This has helped banks to recover from earlier reported paper losses associated with bond holdings, which were eating up their capital base.

Three of the top five large banks that have released their half-year results have seen their capital base grow by more than Sh3.4 billion owing to re-valuation of their portfolio of government securities.

Co-operative Bank was the greatest beneficiary with a reversal of its Sh963 million loss position to a gain of Sh883 million as at June 30.

“As the rates come down we have the bond value improve. Our bond position is about Sh26 billion so a differential of two to three percentage points would impact on the valuation,” said the director of finance at Co-op Bank, Patrick Nyagah.

A Sh318 million loss captured by Barclays Bank under “other comprehensive income” in the first quarter reverted to Sh819 million profits in the quarter ending June relating to Sh42 billion worth of bonds held by the lender.

Equity Bank reported a Sh315 million gain in June from a negative position of Sh356 million.

The 91-day Treasury bill rate dropped to 8.3 per cent in June from 12.7 per cent in March.

This article was first published in our sister publication the Business Daily