African Banks Find Solace in 12% Bond Yields

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Nume Ekeghe with agency report

Measures by some African countries to get money flowing into the real economy aren’t working yet, with banks parking cash in government bonds as the economic slowdown cuts demand for credit.

According to Bloomberg, lenders have little choice but to invest in government securities as opportunities to deploy unprecedented amounts of liquidity provided by their central banks dry up.

Lockdowns aimed at containing the spread of the coronavirus have brought trade to a halt, leaving lenders to focus on helping existing customers with payment holidays or loan restructurings.

“In this kind of environment, where you have weak economic activity and high risk profile, it is very difficult to grow your loan book,” an analyst at Chapel Hill Denham, Omotola Abimbola said.

“Many banks will want to preserve their capital by taking as little risk as possible and then invest in government securities.”

Central banks in South Africa, Kenya, Ghana have released billions of dollars from lenders’ balance sheets by easing measures on how much capital lenders need to set aside.

Deep interest-rate cuts means banks make less money on loans, while rising impairments and a reduction in fee and transaction income will also weigh on lenders’ earnings, Moody’s Investors Service said in an email.

“At best, profitability will stay flat year-on-year,” the chief executive officer of Callstreet Research and Analytics, George Bodo said.

“Credit risks were already elevated across the region. Covid-19 just exacerbated everything.”

While banks are required to hold a certain amount of high-quality liquid assets such as government securities, regulators in Nigeria, Kenya and Ghana have berated lenders for not doing enough to support their economies in the past.

Profiting from the investments could result in a regulatory backlash, said Courage Martey, an Africa economist at Databank Group in Accra.

“If the potential sanctions or punishments are not likely to wipe out the potential benefits of holding risk-free Treasury debts, then the banks would most likely prefer to absorb the punishment in the hunt for high-yielding and safer treasuries than aggressive loan-book expansion.”