TREASURY BILLS FOR DUMMIES

You are tired of earning 0.5% interest on your Savings Account,uninterested in all those mutual funds/unit trusts but need a place to keep your money."Treasury Bills !" (Short term paperless Government Borrowing issued through Central Bank for periods up to 1 year)pops into your head.Central Bank of Kenya (CBK) announced that you can buy Treasury Bills from Ksh 100,000 and multiples of Ksh 50,000 thereafter.

How do you start?
The first thing is to open a CDS account with at the CBK.Download the application forms off the CBK site then fill them in and return them to any of the CBK branches- Nairobi,Mombasa,Kisumu and Eldoret.

Before you invest there is the investing jargon that you need to understand such as:
TENOR- Length of time before a bill pays back the principal amount.For instance a Trasury Bill that pays back its principal in 91 days has a 91day tenor.

MATURITY DATE- Date on which the bill pays back the investor the principal invested and interest.

FACE VALUE- Full value of a treasury bill that is issued eg. if a Ksh 1 billion treasury bill is issued.Its face value is Ksh 1 billion.Face value may differ from what you pay in.If a bill is at discount you pay less than face value i.e. less than Ksh 1 million.a bill issued at PAR is paid for at full face value i.e. Ksh 1 million for Ksh 1 million.

Applying for your Treasuries
With your CDS account ready,you can apply for the treasury bills auctions on a weekly basis.
91 day and 182 day treasuries are issued alternately i.e if 91 day is auctioned this week , 182 day is done the following week.

Treasury Bills are sold at a discount- you pay for less than face value and on maturity you get what you put in plus interest .The two are equal to face value.
For example,CBK offers a Ksh 100,000, 364 day Treasury bill at 8% interest per annum at a discount.An investor would pay Ksh 92,593 and receive Ksh 7,408 interst on maturity after 1 year.His total return would be Ksh 100,000= Ksh 92,593+Ksh 7,408. (i have ignored taxes)

The FACE VALUE of the bill is Ksh 100,000, the discount is the interest of Ksh 7,408. All Government of Kenya treasury bills follow a simialr pricing format.

CBK has a bond price calculator on their website. Key in your required return,initial investment and get the expected returns and tax amount.Click on the hyperlink for the CBK treasury pricing Calculator.

Competitive or Non Competitive?
When applying you have an option of bidding competitive or non competitive.Competitive bidding means that you quote a rate to CBK.Unless,you are a financial proffessional-know a lot about interest rates and Yield curves - bid Non competitive(limit for non-competitive is Ksh 10 million).Because you may ask too high a rate an your bid may be rejected.Non-Competitive means that you will accept the average interest rate at that auction.

How it goes

Every week CBK will offer treasuries for auction via notices placed in the media and on their site.You must apply by Thursday 2pm weekly.The auction results come out on the next day -Friday on their site and the Daily Nation.Allocations are to be paid on the following Monday(known as the value date) to CBK by 2p.m.

On Maturity

CBK wires the principal and interest(Face Value) to your bank account unless you have used your CDS account as security for a loan.Then it's wired to the lender.Rollovers are allowed i.e. your proceeds are applied to the next treasury auction.

Small Investors

Small investors may find it easier to go through a money market or bond fund.The process for small amounts of money may be tedious and the interest rates not exciting.e.g. if you invested Ksh 100,000 in in the 182 day Treasury bill auction-1849 of 02/11/2009,payment would be Ksh 96,712.20 and interest Ksh 3,287.80 after tax for the period.

For amounts above Ksh 1 million (US$ 12,987) it makes sense.Because to get an attractive fixed rate at a locally based bank you must have at least Ksh 10 million (US$ 129,870).

I came across some more blog posts on bonds:

hatua.blogspot.com- Good post on bond pricing

Kenyankytoon-A beginner's introduction to bonds but with a US/Canadian flavour

CREDIT RATING,BANKS,BONDS and SEPTEMBER


September 2008 was a good month.At least on the legislative and regulatory front.Two interesting developments that serve to deepen our financial markets occurred.

1.Credit rating regulations Gazetted by the Government.
Banks and other financial institutions can now share information on your payment(defaulting habits).Hopefully it will move to all businesses including your landlord.Any body with access to your credit information will be able to judge how honest you are on your promise to "send the check by Friday".
If it works like other countries it should make it easier for persons with good credit histories to get loans at good terms from their banks.Businesses with good history will find it easier to get supplier credit.
The flip side is that a bad credit rating will make it difficult to even rent a good house-(if ur prospective landlord sees that your score is bad, he may not want your tenancy).

2.Banks allowed to lend to each other using their securities as collateral
This may confuse those who don't deal with banks, how can a bank keep cash but run out of liquidity?Banks are like any business enterprise sometimes they need more cash than they keep at hand.When this happens, they have two ways of raising cash:-

A. Borrow money from the Central Bank (CBK)through REPOs(Repurchase agreements).These transactions involve the Commercial bank using its Treasury bonds and bills as security to borrow from the Central Bank

B.Borrow money from each other via the Interbank market
The new rules add a C option.

C.The new interbank master repurchase agreements.The transactions here are similar to REPOs the difference being that instead of having CBK and a bank transacting, we have a commercial bank to commercial bank transaction the borrowing bank gives securities to the lending bank as collateral for the lending.

Too bad the papers got it wrong and thought that everyone could trade bonds without going to the NSE.CMA came out with a clarification that this wasn't ain't so.

BARCLAYS Vs EQUITY

In the Blue corner we have Barclays!! in the Red Corner we have Equity.Lets get ready to ruuuumble........... sorry got carried away, this post is on the banking sector.The best way to do it is to focus on two players everyone talks about:-Barclays Bank(BBK)-Old style bank, majority owned by Barclays Plc+ about to be taken over by ABSA-South Africa -a Barclays Plc group co.

-Equity Bank-Indigenous owned bank that has grown @ sonic the hedhog speed.EPS is up 120% last year.

Brief Stats as at January 2007

Barclays Equity

ATM's 80 105

Branches 60 42

Pre-Tax Profits in 2006 sh6.6Billion Sh1.1 Billion

Barclays Bank

Click here to see the latest Financial results

Pros

-Large Bank+solid reputation
-Large wealthier customer base
-Steady dividend payout
-Large and diversified product base e.g BarclayCard credit cards,Wealth management,Trade Finance....

Cons

-Owned by Barclays Plc. so London will always guide major decisions.Compare that with Equity Bank that bought its IT software from the best vendor(according to mgt.)- INFOSYS of India.If BBK had to make a similar decision it would probably buy whatever software the Plc. uses

-Attempting to copy Equity Bank retail model.However, the clients they are going after may be sub-prime and they may not have the experience of dealing with them.NPA's may rise.By the way they're doing something similar to Equity in Ghana.

-Takeover of Barclays Africa by ABSA. I hope this doesn't distract the management of BBK from the task at hand.

Equity Bank

Click here to see the latest Financial results

Pros
-Great banking model.Everyone is trying to copy it from BBK to Co-operative Bank
-Fast growing.Earnings are up 120% for 2006.A bonus offer has been given signaling further earnings growth
-Largest ATM network.equity has bought 100 ATMs read here for more.This should bring their ATMs to more than 200 at the end of 2007.compare that with 200 that Barclays will have at the end of 3 years.
-Aware of their market position and their competitors.So they have an awareness of where they are going and what copmetitors are upto.
-Low cost base.Equity can give you a loan of Ksh 10,000.I think the lowest Barclays can give is Ksh 50,000.Below that their(barclays) cost structure can't allow it.

Cons

-At some point the 100% growth will slow down.According to the prospectus(for the NSE listing) this will be around 2009.
-All fast growing banks have had to deal with larger NPA's at some point.Will this ever happen to Equity?
-Public perception-The public has always viewed the bank as belonging to one community.The other thing is that middle class/upper Kenyans believe that a white,hopefully) British man has to be at the back of any successful Bank.

My thoughts

I think Barclays should stick to its current clientele and try to make services better for them.E.g. Barclays had a cash/cheque deposit at Queensway that used to work. Not anymore.You have to go into the banking hall to deposit.

Barclays should try making its other services e.g Credit cards better.e.g.if you pay your card bill by cash-it takes upto 3 days to credit your Barclaycard.

I think the shift downmarket may slow Barclays' profit growth.Equity still has room to grow i.e. as they increase branches, the deposits will grow.However, at some point in the next 3 years growth will stabilise to normal levels and the management will have to consolidate the gains.At that stage is when management will be tested.

Equity has avoided the blunders of earlier Local banks i.e. depending on one group of depositors.i.e EURO Bank got most of its deposits from Parastatals.So, when politicians changed and deposits were recalled, there was no way out but down.

The other reasons why i'm confident about Equity's stability are:

-CBK supervison has greatly improved.CBK now monitors Banks much better.Before any results are given to the NSE or Public,CBK goes over them.To make sure all is prudent.

-Equity uses a 30 day period to classify loans as Bad or good.This is more conservative than the 90 days CBK regulation.(read the prospectus)

Where my money is

My money is on Equity,i think they will outperform the market in the medium term(3-5 years).i have bought it for capital gains.
Barclays is too big and if they grow bigger(from 60 branches to 120 branches),they might loose focus.I dont expect them to outperform the market in the next 3-5 years.But the dividends should remain great
Barclays is approaching the statutory limits of lending thats why dividends were low for 2006.(Earnings were retained in order to increase capital)

Conclusion

Barclays for the dividends, Equity for the capital gains.With the downward trend in prices it will pay to wait and add once the retail investors on the exchange panic and sell. But for equity buy at any price below sh.230/- because you get 3 shares for the price of 1(Cum-bonus).

Chill and pick Barclays at sh.60 and below.

For those who want to read more

"Understanding the Re-birth of Equity Building Society in Kenya" An interesting study of how Equity moved from an insolvent Building Society to a successful one and finally to a bank.This study was done in May 2002 but the issues raised are still relevant.

Click here- more studies on Equity Bank done by MICROSAVE can be found here.

An interesting article in THE BANKER about Barclays Plc and its plan for Barclays Kenya(Found the link on Kenya Capital).Click here