Trading bonds in Kenya I believe is tough, market data is scanty, the yield curve doesn't have all points along the curve covered, the tendency of bondholders to be satisfied with the coupons and not capital gains due to bond prices, the list is endless and so are the opportunities for a smart player to make big money.

active management strategies are less practised in kenya(valuation analysis , credit analysis or interest rate anticipation.this is due to the fact that tracking error is large due to the volatility in interest rates.also the general economic climate and demand fo bonds is low due to high inflation rates and slow global economic pace experienced now.

kenyans practice the more common buy and hold strategy that is easy to practice and minimizes tracking error

Polymer1,

I dont think the Kenyan fixed income market is that specialised. The main driving force is the level of budget financing...and the actions by the financing agent for the government, CBK.

CBK has for the past three years tried to encourage retail investors to participate in primary treasury bonds auctions. But all the time I hear their participation in any issue is that retail investors bought less than 5% of the bond....and that was the same with the KenGen PIBO!

I do agree with you that there is some aspects of information that NSE provides regarding bond transactions is either scanty or wrong.

When you have a moment, try to recompute the yields and/or clean prices provided by NSE in their daily trading report. You will notice the numbers don't make sense at all...at least that's what I have seen for the past couple of months.

Scubidu,

In coming up with core or Tier I capital, all banks are required to deduct their carrying value of all investments (whether they are subsidiaries or associated companies) in non-bank financial institutions.

For CfCStanbic bank, it means that they have to deduct about Kshs. 410 million as at 30 June 2010 as compared to Kshs. 338 million in December 2009. So, if these investments continue to be profitable, the banks will be required to continually reduce their Tier I capital as the carrying value of their investments will keep rising.

The deductions also mean that the bank is forced to restrict growing its balance sheet (both assets and liabilities) by about Kshs. 5 billion. Hence, it makes sense (at least for me) for the bank to spin off its insurance subsidiary, which I thought was supposed to be concluded sometime in the year.

Correct me if am wrong, but I thought that the rationale for the bank issuing the second tranche is to prevent the bank from breaching the minimum level of Tier I capital to deposits ratio of 8% (as of September 2010, the actual ratio is 8.6%). The proceeds of the bond would then allow the bank to “continue” growing its balance sheet as they limit the level of deposits it can take.

Going forward, if the bank is able to complete the spin off of CfC Insurance Holdings sometime in 2011, there should be no worries about the bank worrying about this and the future impact of the subordinated debt, which I’ll explain below…

Another thing to note is that banks are allowed to recognise their entire amount of subordinated debt (as part of Tier II capital) as if the duration of the bond is greater than or equal to five years. For any bond durations lower than five years are pro rated at 20% intervals. In this case, CfC Stanbic will be required to only recognise Kshs. 2 billion and not Kshs 2.5 billion (assuming the entire issue is fully subscribed) in 2010.

In 2011 and each financial year end thereafter, they will be reducing their Tier II capital by Kshs. 500 million per annum.

Hope this helps

Scubidu,

I read somewhere,about a month ago, that the parent bank (i.e. Standard Bank SA) is having issues of their own...I read recently that they are planning to retrench some staff in South Africa since they are not performing as expected.

So, there is a slim chance that they would have helped CfCStanbic with a direct loan or preference shares. Also, be on the lookout for such restructuring to affect their Kenyan subsidiary.

Your argument about term debt is precisely what Angela Merkel has been saying this year...that debt holders should start bearing some of the risk of financial loss as shareholders. And as a result, Ireland had to take this approach following the IMF bailout.

Also, you are not alone in being confused about capital adequacy and core capital. Basel is hoping that Basel III will address that. It seeks to ensure that majority of the capital is indeed Tier I capital (or core capital as per CBK's definition) and not Tier II or even worse, Tier III capital.

Regards

Scubidu,

Happy New Year to you as well!

The way I understand the Kenyan legislative framework is that the Banking Act stipulates the minimum level of capital that banks are required to maintain. The Act is quite vague as to what constitutes core capital of Kshs 350 million which will later increase to Kshs. 1 billion as at 31 December 2012 (I got this details from the Second Schedule of the Act).

Hence, the prudential guidelines that the CBK issued in 2006 provide in detail as to what a bank can state as Tier I (core capital) or Tier II capital (supplementary capital)...see pages 57 or 58 of the link below. Also, remember that the guidelines are in compliance with the current Basel requirements.

So, going as per the CBK/Basel principles, I highly doubt that they would include subordinated debt as part of Tier I capital. However, given the way our MPs are behaving, they could be easily decide to include it in the Act riding on the vagueness of the Act.

And I'll be curious as to how the banking industry will react to such an amendment as it will definitely result in a conflict between our legislation and the Basel principles assuming they are not the ones pushing for this.

Hope this makes sense to you...and let me know if it will ease your confusion.

Regards

Here is the link - http://www.centralbank.g...ial_guidelines_2006.pdf

Scubidu,

Thanks for your complements...am glad to be of assistance whenever I can. That's what we are all here for in this forum i.e. learn and help each other.

For the CfC bond, I do agree that there four reasons are plausible. And I believe that we have already chatted about the capital rationale. Might you have any further queries on that bit...

Thereafter, we could try to figure out the liquidity and liability reasons. FYI, the banks tend to address the two together as they are inter -related.

As for the HTM bit, central banks generally prescribe the applicable accounting standards to be used in their jurisdictions - and am yet to hear of a situation where banks were forced to prepare their financials contrary to the accounting standards.

Regards