Dr. Mbako Mbo, FNBB CFO
Eyes Swaps to Capitalise on Interest Rate Differentials during a hawkish environment
14% of income came from treasury instruments
First National Bank Botswana (FNBB) has nearly doubled its investment securities portfolio in the 12 months ended 30 June 2024, growing by 94% to P11.6 billion, owing to a significant inflow of pension fund assets back from offshore markets in response to new regulations.
This windfall, alongside what CFO Dr. Mbako Mbo termed “a robust treasury function”, has positioned FNBB to leverage these funds effectively, with 14% of its income now stemming from treasury instruments. The majority of the bank’s earnings are derived from its core business of customer advances, which accounts for 73% of total income.
FNBB closed its year-end June 2024 with a P30 billion deposit base, having jumped 29%. The bank said the growth in its Treasury deposits, comprising liabilities from financial institutions and certain key corporates grew P4.4 billion during the year and this was mainly driven by the localisation of pension funds previously held offshore. These constitute the bulk of the P6.6 billion (28%) growth in the overall deposit base. Typically, the bank said, these funds go through deposit accounts before deployment to target asset classes.
Due to their focus on infrastructure, which is inherently long-term, bankers expected the pension funds’ assets repatriated to Botswana to be sticky.
They believe that such circumstances present opportunities for asset managers within the money market space, typically spanning up to 12 months. The money market involves trading in very short-term debt investments, including Treasury bills and Bank of Botswana Certificates (BoBCs).
Asset growth lower than deposit
The market was flushed with liquidity owing to increased government spending and repatriation of funds towards the end of last year and early this year. Observers said there weren’t avenues in which this excess liquidity could be deployed as asset growth is much lower compared to deposit growth. FNBB’s advances grew 14% versus 29% growth in deposits. Bankers say asset growth usually takes form in the second half.
T-Bills preserve yield
What banks were left with was a situation of excess liquidity and nowhere to place that liquidity to earn a return and therefore needed liquid assets (BOBc, T-bills) to invest in to earn a return. The preference is yield and therefore T-bills have looked attractive because the yields are higher compared to BOBcs. This is why there is a high bid to cover ratios for t-bills because they are usually higher-yielding compared to BoBcs. The market saw a high T-Bill demand remaining coupled with the new cap which resulted in higher T-Bill holdings by banks. The other thing that made t-bills more attractive was that they would have an element of yield preservation for those who have an outlook that rates may decrease in the short term.
14% of FNBB income derived from treasury instruments
FNBB CFO Dr. Mbako Mbo stated during the results presentation that the bank has a robust treasury function managing its liquidity, which has facilitated significant placements in investment securities.
He revealed that as such 14% of the bank’s income came from treasury instruments which “we do believe it’s broadly in line with how we are organised as FNBB”.
Rate cut impact on yield is mixed
Pension funds have reached this year’s statutory limit, with estimates suggesting that by 2025, they will repatriate approximately P4 billion. As FNBB continues to invest these funds in securities, expectations regarding their impact on the yield curve remain mixed.
Typically, when there is a rate cut or increase, treasurers expect the shorter end of the yield curve to respond more quickly than the longer end, and this has been observed in previous instances.
So far, bankers have noted that the shorter end of the yield curve is responding slowly to changes, primarily due to low rates. In contrast, yields on the longer end of the curve (4 to 5 years) have been increasing, which experts attribute to the government's funding needs.
FNBB outlook
During the presentation of the results, a question was raised about how FNBB plans to navigate the challenges posed by a dovish environment, especially as some economists anticipate another rate cut. Tshepiso Mokgethi-Magapa, the bank’s Treasurer, explained that they had doubled their investment securities based on the bank’s outlook regarding interest rates.
“Hence we made the right decisions back then which will carry us into the current financial year that we started.”
She noted that the bank is currently seeking opportunities in other markets where they can engage in swaps and take advantage of interest rate differentials.
“When we do our bilateral engagements, those are some of the things that we go into, in terms of determining strategies for investing in other markets from a sovereign perspective.”
She believes “we were quite ahead from the Botswana perspective in terms of lowering other rates versus other markets”.
The Bank of Botswana’s (BoB) Monetary Policy Committee (MPC) cut the Monetary Policy Rate (MoPR) by 25bps in June 2024, against general market expectations for rates to remain unchanged. This followed inflation having reverted to the Central Bank’s objective range, subsequently, the MPC cut MoPR further by 25bps in August 2024.
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