Last year, NBK reduced government securities held for trading purposes from Sh10.7 billion to as low as Sh828.8 million.
During the third quarter of 2011 NBK profits went down nine per cent on the back of rising interest rates that pushed the values of its bonds down.
The lower values of government securities held by the bank raised other operating expenses due to rising interest rates, which made the bonds previously bought at lower interest rates to be at a loss position when marked to market. Heavy exposure to the bonds is said to be the undoing of the bank
In line with other banks, NBK in the third quarter sharply reduced its investment in government securities to Sh1.88 billion, up from Sh11.18 billion, to avoid further revaluation losses as yields rise.
Yields on government securities were on a steady rise last year, due to higher inflation and tight liquidity in the market, with the 91-day Treasury bills hitting a high of 19.91 per cent in the week ending December 30, last year.
NBK is among state-owned banks, which have the lionâs share of cash deposits belonging to the central Government and parastatals, guaranteeing them a steady source of funds for lending.
All government ministries have an account with the CBK, but they are allowed to open accounts with commercial banks where they can transfer their budgetary allocations.
The Governmentâs efforts to resuscitate NBK and KCB in the 1990s saw it direct its departments to hold accounts with these two lenders.
Initially, this policy approach worked well for the bank and helped cushion the bank from the impact of mass withdrawals experienced during the trouble financial period of 1998. This period saw Trust Bank, City Finance, Bullion and Reliance banks all came down tumbling with hundreds of millions of shillings of depositor funds.
NBK and Kenya Commercial Bank - the two big State-owned banks - only survived the meltdown with heavy government support that involved appointment of professionals such as Gareth George and Mr Marambii as chief executives and ordering parastatals and other government agencies to hold their accounts with the two.
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