Banks’ prudent for shunning T-bills for bonds – Moody’s


Moody’s ratings agency has said the decision by banks in the country to move away from short-term government securities to long-term securities is just about enough for these banks to cut their losses as interest rates on the short-term Treasury bills decline.

The 91-day Treasury bill yield declined 753 basis points to 13.3% in January 2018 from 20.9% in November 2016, while the yield on the 182-day Treasury bill yield declined 868 basis points to 13.9% from 22.6% over the same period.

The two-year government bond interest rate, however, has been more resilient – declining 582 basis points to 17.2% from 23.0% over the same period.

Generally, investment securities formed a large proportion of Ghanaian banks’ assets at about 31 percent in December 2017, while income from these securities contributed around 38 percent of banks’ total income.

According to the Moody’s press release, the high contribution to banks’ total income was supported by high interest income from short-term government securities that earned high yields.

“However, as short-term interest rates fell in 2017, banks shifted their exposure to longer-dated government bonds. Longer-dated bond exposure increased by 154 percent to GH¢8.383billion between October 2016 and January 2018, while exposure to Treasury bills decreased by 84 percent to GH¢1.261billion.

“Falling short-term interest rates suppress banks’ interest income, because banks invest funds from their maturing securities at lower yields.

“Annual growth of interest income slowed to 17.3 percent in December 2017 from 29.2 percent in 2016, reflecting the negative pressure of falling interest rates on government securities and falling loan volume,” Moody’s said.

The ratings agency further stated that investing in longer-dated securities enables banks to lock in higher yields, moderating the downward pressure on their interest income.

“We expect Ghana’s inflation rate to fall to 8.0% next year from 15.4% in 2016, which will increase the probability of further interest rate declines,” the agency said.

In the unlikely event that the country’s interest rates rise sharply, Moody’s said, banks would incur revaluation losses on their longer-dated bond holdings because the prices of these securities would decline.

Also, the release argued, banks would forego higher interest income because they would have fixed their investments at lower yields, while the interest paid to their short-term deposits would rise in line with rising market rates – eroding their net interest margins and profitability, everything being equal.

“Additionally, longer-dated bonds tend to have lower trading liquidity and therefore occasionally may be difficult to sell, exposing banks to larger discounts when selling,” the release concluded.

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