Equity climbs out of bond paper losses

Equity Group’s unrealised paper losses on its bond holdings shrank nearly six times in the year to June 2022 on the back of falling yields on its Eurobond investments in the period.

The lender said in its 2022 half-year financials that the fair value losses on the bonds stood at Sh6.8 billion, down from Sh38.9 billion a year earlier.

Read: Bank losses on bond holdings surge to Sh66bn

Lenders suffered from a devaluation of bond prices last year, especially for Eurobonds where yields rose to as high as 22 percent on securities whose coupon rates were in the single digits. Bond prices and yields move in opposite to each other.

The fair value losses are based on the difference between the current value of the securities in the secondary market versus the acquisition cost.

These paper losses can only be realised in the event of a sale of the securities.

It is largely similar to the periodic erosion of paper wealth at the equities market at the Nairobi Securities Exchange (NSE), depending on daily share price movements, which is only realised upon a sale.

Equity holds its Eurobond securities to maturity, so these bond losses are not realised on the financial statement.

“When we reported earlier on, the yields on Eurobonds were at 14 percent, when we reported this one they were at 11.5 percent and that explains the significant drop in mark to market losses on the securities,” said Equity Group chief executive James Mwangi in a briefing earlier this week.

Global shocks were to blame for the uncertainty in the market last year which pushed rate demands higher. Key among these was the Russia-Ukraine war which began in February 2022, and high inflation in western markets that forced central banks to hike their base rates.

These shocks have eased somewhat this year, especially the inflationary pressure, allowing investors to cut the risk premium that they were apportioning on sovereign debt.

Equity, at the end of June, held investment securities worth Sh485.6 billion, out of which Sh278.5 billion were in the form of Treasury bonds and bills.

Other securities, which would include the Eurobond investments, were valued at Sh207.1 billion.

Co-operative Bank of Kenya’s fair value bonds losses also fell in the period, standing at Sh2.8 billion compared to Sh5.9 billion in June 2021.

Despite the paper losses, the risk to large local banks is seen as minimal due to their high liquidity and diversified sources of deposits, especially from the large pool of retail depositors.

Local bond yields have gone up in recent weeks, and are likely to reflect in the valuations of bonds by the end of the third quarter or the year.

Read: Top listed banks record Sh55bn paper losses on bonds

There is an expectation however that rates may ease downward if the government keeps its promise to cut its domestic borrowing target to Sh316 billion from Sh586.5 billion in the current fiscal year.

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