(Bloomberg) -- Kenyan banks are cutting back their investment in government securities even with Treasury returns lingering at record highs.
During the first half ended in June, Standard Chartered Bank Kenya Ltd. slashed its holdings of government debt by 10%. Equity Group Holdings Plc, the nation’s biggest lender by value, cut its stock by 5% between January and June, while KCB Group Plc and NCBA Group Plc dropped 1.5% and 1.1% respectively.
Three-month Treasury bills are still yielding close to 16% even after the Central Bank of Kenya surprised markets by dropping its benchmark interest rate for the first in more than four years.
The high interest rates coincide with approval for banks to roll out risk-based pricing that will allow them to mark up interest rates for riskier borrowers, according to Ronny Chokaa, a senior research analyst at Nairobi-based AIB-AXYS Africa. In addition, there had been an over-concentration in public debt, with some banks holding as much as 30% of their total assets in those securities.
“Those two factors gave banks a wider scope to trim down their holdings because they can get bigger yields on a smaller portfolio, while deploying the rest to lending,” Chokaa said.
Investors have also spurned long-dated securities as sovereign risks climb. Kenya had little option but to ditch plans to introduce tax measures after deadly protests that left at least 61 people dead. That’s raised concerns about its ability to repay its debt while meeting the needs of its citizens.
Shifting Focus
NCBA Chief Executive Officer John Gachora said the lender is already the biggest lender to the government and would now be making more cash available to other customers.
“With the changing interest rates, we obviously don’t have the liquidity to put more into government securities,” he said. “We are using a lot of our liquidity to support our customers.”
The lender’s aggressive branch expansion will likely increase its deposit base and customer demand for loans, Sterling Capital said in a research note.
NCBA posted a 5% rise in profit in the six-month period, compared with KCB Group, whose net income skyrocketed 87%. KCB too intends to shift focus away from the government to fund other areas, Chief Finance Officer Lawrence Kimathi said.
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