Kenyan banks have reduced their exposure to government bonds significantly over the past year amid mounting losses fueled by increasing interest rates.

Latest data from the central bank’s weekly bulletin say that commercial banks have scaled down their bond holdings from 48 per cent in June 2022 to 45 per cent in June 2023 totaling Sh136 billion in bond sale.

This means that the banks are also struggling to offload the bonds in the secondary market as turnover declines.

“Bond turnover in the domestic secondary market declined by 53.3 per cent during the week ending August 24,” the Central Bank of Kenya report read in part.

The trend follows a worrying trajectory for tier-one banks, which collectively reported a staggering paper loss of Sh55.17 billion of market value on bond holdings in the previous year.

This sharp decline was largely attributed to the surge in global interest rates, which inversely impacted the market prices of these securities.

Notably, this loss marked a significant escalation from the Sh12.5 billion reported at the close of 2021, underscoring the intricate relationship between bond yields and prices.

Market experts and industry insiders have been closely monitoring the situation, and have weighed in on the evolving scenario. Speaking at a recent financial briefing, James Mwangi, the Chief Executive Officer of Equity Group, shared his insights on the matter: “The prediction is that we are almost reaching the peak of inflation, so by 2024 interest rates will begin to start coming down,” Mwangi stated.

This assertion — if proven correct – could potentially provide a ray of hope for the banks that have been grappling with these adverse market conditions.

In addition to grappling with interest rate fluctuations, Kenyan banks have been contending with the broader concern of a sovereign default. This apprehension has driven some financial institutions to reconsider their exposure to government bonds, thereby safeguarding their portfolios against potential shocks stemming from this perceived risk.

Interestingly, this unsettling situation has also reverberated across credit rating agencies. Moody’s, a prominent credit rating agency, recently downgraded several leading local banks due to their strong connections with the government.

Elsewhere, CIC Insurance Group has announced a profit before tax of Sh1.2 billion for the first half of this year. This is a 153 per cent growth compared to the restated profit before tax of Sh472 million same period in 2022.

Overall insurance revenue grew by 20 per cent compared to restated prior period, jumping to Sh12.9 billion in June 2023 from Sh10.7 billion in June 2022.

During that period, profit after tax increased by 168 per cent to Sh705 million in June 2023 compared to Sh263 million recorded in June 2022.

CIC said in a statement that the performance was driven by continued execution of the firm’s 2021-2025 strategy underpinned by key transformational initiatives focusing on digital transformation, data analytics, performance management, operational efficiency, research and innovation and debt management.
Insurance service results grew by 93 per cent to Sh862 million from Sh446 million on account of the insurance revenue growth.

Interest revenue grew by 21 per cent from Sh975 million to Sh1.2 billion. “Looking ahead we will remain focused on delivering on business growth and profitability through partnering with all our stakeholders while at the same time progressively building a socially responsible and sustainable business,” reads the statement in part.

All the regional subsidiaries recorded growth in insurance revenue. General insurance subsidiaries in Kenya saw revenue grow by 21 per cent to Sh7 billion in June 2023 from Sh6 billion recorded in 2022 attributable to business growth.

Life insurance revenue grew by 23 per cent from Sh3.5b recorded in June 2022 to Sh4.3b in June 2023 owing to strong focus on prudent underwriting and business growth across all the Life business lines.