Banks demand for treasuries raise credit squeeze risk

Sunday September 25 2016

The government risks crowding out the private sector from the domestic market as banks fight to give the Treasury cheap credit days after loan rate caps were effected, further stalling credit growth.

Banks, reeling from the effect of the interest rate cap, have reacted by outbidding each other to record an overwhelming 225 per cent performance rate for the 5-year and 20-year Treasury Bonds issued this month.

The Central Bank of Kenya (CBK) reported that the total number of bids received was 771 amounting to Sh38.65 billion and 734 amounting to Sh17.80 billion for the 5-year and 20-year bond respectively.

“The weighted average rate for successful bids was 13.112 per cent (down 95.7bps from the previous auction) for the 5-year bond and 14.601 per cent (down 23.5bps from the previous auction) for the 20-year bond,” Standard Investment Bank said in a note to clients.

In July, the Treasury took a 5-year and 20-year Treasury Bonds for a total amount of Sh30 billion at 14.069 per cent and 14.836 per cent respectively.

The Treasury accepted Sh35 billion, Sh10 billion more than it had indicated when advertising for the bonds taking advantage of the banks willingness to lend to government.


“The rate will keep coming down for a bit longer, my estimate being that the floor might even be breached by up to 50-100 basis points. At that point hopefully reason will kick in and we will start to see cash being deployed elsewhere than government debt,” Deepak Dave of Riverside Capital.

Last week, Treasury bill rates edged down as banks bombarded the government with 230 bids amounting to Sh10.07 billion representing 167.77 per cent subscription and 156 bids amounting to Sh10.67 billion representing 177.90 per cent subscription for the half- and full-year short-term papers.

READ: Interest rates on govt securities fall amid heavy bidding by banks

The government rejected most of them taking only Sh5.16 billion for 182 days and Sh7.28 billion for 364 days Treasury bills at 10.568 per cent and 10.599 per cent respectively.

This comes even as credit growth in the private sector reduced by over a third from 21.4 per cent a year ago to 7.2 per cent in July this year, according to Ecobank research. This was half of the 15.3 per cent target the CBK had set to support economic growth.

Banks may, however, need to change tack and lend to the private sector if the rates continue to fall as a result of their own strategy that has led to overcrowding risk-free government debt.

According to Ecobank research, the move by the CBK Monetary Policy Committee (MPC) to reduce the Central Bank Rate this week though will lower the attractiveness of government securities to investors as they will be making as little as one per cent to four per cent on Treasury bills.

“Currently, with inflation at 6.3 per cent, and with nominal yields ranging between 7.99-10.89 per cent on short term government securities, this provides real returns of between 1.69-4.59 per cent only,” Ecobank said.