Ghana banks’ focus on longer-dated securities is credit positive – Moody’s

Two weeks ago the Bank of Ghana released a statistical bulletin which showed that banks in the country have shifted their government securities exposures to longer-dated government bonds at the expense of shorter-term treasury bills. The action will will lock in higher yields, and it is credit positive, the rating agency Moody’s has said in a report copied to

“As a result, the contribution of treasury bonds to banks’ holdings of total government securities increased to 87 per cent in January 2018 from 29 per cent in October 2016. Increasing the maturity profile of their investment portfolios amid falling short-term interest rates will lock in higher yields of longer-dated securities, easing the strain on banks’ interest income, a credit positive,” the report noted.

Commenting, Peter Mushangwe, a banking analyst at Moody’s says, “Ghanaian banks shifting their government securities exposures to longer-dated government bonds at the expense of shorter-term treasury bills is credit positive as it will help moderate the strain on the banks’ interest income amid falling short-term interest rates.”

Moody’s indicates that investment securities were a large proportion of Ghanaian banks’ assets, standing at about 31 per cent in December 2017, and income from these securities contributed around 38 per cent of banks’ total income.

According to Moody’s, 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 per cent to GH¢8.383 billion between October 2016 and January 2018, while exposure to treasury bills decreased by 84 per cent to GH¢1.261 billion,” it said.

Moody’s further states that the move to longer-dated securities is occurring amid falling short-term interest rates.

It points out that the 91-day treasury bill yield declined 753 basis points to 13.3 per cent in January 2018 from 20.9 per cent in November 2016, while the yield on the 182-day treasury bill declined 868 basis points to 13.9 per cent from 22.6 per cent over the same period.

“However, the two-year government bond interest rate has been more resilient, declining 582 basis points to 17.2 per cent from 23.0 per cent over the same period,” it said.

Moody’s believes that falling short-term interest rates suppress banks’ interest income because banks invest funds from their maturing securities at lower yields, noting that annual growth of interest income slowed to 17.3 per cent in December 2017 from 29.2 per cent in 2016, reflecting the negative pressure of falling interest rates on government securities and falling loan volume.

“Investing in longer-dated securities enables banks to lock in higher yields, moderating the downward pressure on their interest income,” Moody’s said.

By Emmanuel K. Dogbevi
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