The high interest rate regime has seen the value of bonds held by Kenya’s top banks reduced by Ksh10.17 billion ($97.88 million) during the nine months period to September 30, signalling a possible drop in profit.

“There is little doubt that the strength of the US dollar early in the year and receding risk appetite towards emerging and frontier economies as expectations of  Fed tightening took hold, was largely responsible for the pressure on East African currencies,” said Razia Khan, chief economist at Standard Chartered Bank Plc.

“East African currencies were also considered vulnerable because interest rates were low. In the case of Uganda, that has been corrected significantly. In Kenya’s case, market interest rates have come down. The sustainability of this will be questioned,” added Ms Khan.

Kenya has seen rising interest rates over the past six months peaking in September and October with its Central Bank pursuing a tight monetary policy stance to control inflation and stabilise the shilling.

READ: CBK releases $153m into the market to stabilise interest rates

The rates on the 91-day Treasury bill surged from 8.6 per cent in January to a high of 22.6 per cent between September and October 2015.

Interbank rates — the rate at which banks borrow from each other overnight — jumped   from 7.1 per cent to 25.8 per cent in the same period, signalling a dearth of cash  in the banking sector.

Currently, the 91-day Treasury bill rate stands at 9.57 per cent while the inter-bank rate have dropped to 5.1 per cent according to data from CBK.

“While Kenyan banks will has been impacted by market volatility, the fact that many will now see a capital appreciation in their bond holdings as interest rates recede should go some way towards correcting this,” said Ms Khan.

“The greater concern is credit growth trends and whether momentum can be sustained,” she added.

According to Solomon Alubala, head of Treasury at the National Bank of Kenya (NBK), banks are likely to experience increased value on their bond portfolios as a result of lower interest rates but the sustainability of the low interest rate regime remains in doubt.

“Most likely the impact on profitability of banks will be minimal because the rates have dipped and the inter-bank rates are below 10 per cent. We don’t expect a huge hit but the only danger is if we shall be able to sustain these low rates,” said Mr Alubala.

The top eight banks by profitability whose fair value of bonds available for sale fell by a combined Ksh8.5 billion ($97.88 million) are KCB, Equity, Standard Chartered, Cooperative, Barclays, I&M, CfC Stanbic and NIC.

READ: Soaring interest rates hit Kenya’s bonds market

Market analysts said if interest rates continue declining in the fourth quarter (October-December), the impact of the losses made on bond holdings on full-year earnings may not be significant.

“The impact on the profits will be felt if these banks  decide to sell these bonds but  the dent may also not be significant  because the rates have started coming down,” said Francis Mwangi, head of research at Standard Investment  Bank(SIB).

According to Teddy Pole, an investment analyst at AIB Capital, the losses so far incurred by commercial banks on their bond portfolio may be reversed at the end of the year if interest rates maintain their downward trend.

“The rates have started coming down so I think these losses will be reduced or removed completely by the end of the year. If interest rates decrease then we shall see   bond prices increasing through a compensating effect,” said Pole.

Last year, Kenya’s banking industry recorded losses on its bond holdings valued at Ksh755 million ($7.26 million) down from Ksh2.05 billion ($19.71 million) in 2013, according to data from Central Bank.

The banks held securities available for sale during the period valued at Ksh339.62 billion ($3.26 billion) compared with Ksh291.14 billion ($2.79 billion) in 2013.