HOW AMCON WILL CLEAN UP N2.3TRN BANKS’ TOXIC ASSETS

Filed in Business by on July 26, 2010

How AMCON will clean up N2.3trn banks’ toxic assets
By AMECHI OGBONNA
Monday, July 26, 2010

When the leadership of Central Bank of Nigeria (CBN) and the Federal Ministry of Finance submitted an executive bill to the National Assembly for the establishment of an Asset Management Company (AMCON) to manage the phenomenal stock of toxic loans in the financial sector, it was clearly out of a desire to give Nigerians a system they could be proud of.

And with a cache of bad loans estimated at over N2.3 trillion for the entire financial system, proponents of the bill believed that AMCON has great potentials to boost the economy.

A key motivation for this initiative, according to financial experts, was that AMCON as a crisis resolution vehicle, could soak the toxic assets of heavily exposed banks to release liquidity to oil their operations, while assisting in their recapitalization programmes.

However, while updating stakeholders on the level of progress made with the bill on March 5, 2010, CBN’s Head of Corporate Communications, Mr Mohammed Abdullahi, said that the apex bank had wished that AMCON would have come on stream earlier than envisaged, but that the rigorous process of law-making impacted on its progress. All the same, he stated that the CBN was seriously committed to its successful passage into law in view of its benefits to both the economy and the banking industry.

“Our estimation is that by September 30, 2010, the CBN would have resolved all outstanding issues with all the banks affected,” he noted. However, two months to CBN’s September projection, President Goodluck Jonathan on July 19, 2010 gave his assent to the AMCON Bill in Abuja, thus giving it the force of law and putting the implementing agencies of government on their marks. With its coming on stream, AMCON would be expected to ensure that shareholders recover part of their lost investment as well as assist in reducing the debt overhang that had slowed down recovery process of the capital market.

while reacting to the passage of the bill by the National Assembly, an Abuja-based legal practitioner, Osaro Eghobamien, and Senior Advocate of Nigeria (SAN), explained that “what the corporation strives to achieve was the purchase of non-performing assets from financial institutions such that the borrower then becomes indebted to the corporation instead of the bank.”

In this way, AMCON, he argued, will effectively step into the shoes of the bank and attempts to recover debt from borrower. In the process of playing its role, the corporation would have paid the bank, thus providing liquidity which would enhance the bank’s balance sheet by giving it the opportunity to create new asset. From inception, the CBN had fought the AMCON battle as if the life of the banking industry solely depended on it.

At the back of the minds of the promoters were thoughts of its employment generation potentials, ability to free the balance sheet of lenders to create more risk assets for her dying real sector and other collateral benefits associated with the venture for various stakeholders. These could have fired on the sponsors of the bill to mobilize resources at their disposal to ensure that the bill got the accelerated hearing that led to its passage by the National Assembly and eventually the Presidential assent last Tuesday.

This is because unlike several other executive bills that have been at the National Assembly for many years, the AMCON Bill came at a time Nigerians and the international business community believe it was urgently needed to make the economy and banking industry more robust and resilient in facing the critical challenges of the global economy. For instance, while signing the bill last Monday, President Jonathan had stated that “the establishment of AMCON was a reflection of government’s commitment to safeguarding the interests of depositors, creditors, and other stakeholders in the Nigerian financial system and in doing so rejuvenate the domestic economy.”

Jonathan was optimistic that the AMCON would help to stimulate the recovery of the financial system and ultimately the wider economy through among others, providing liquidity to the banks by buying their non-performing loans, recapitalizing the intervened banks, increasing access to refinancing opportunities for borrowers, increasing confidence in banks’ balance sheets and therefore Nigeria’s credit and risk ratings, encourage a return of confidence to the capital market and preventing continued job losses in the banking industry.

He commended the Ministry of Finance, Ministry of Justice and the Central Bank of Nigeria(CBN) for the collaboration that was put into the preparation and finalization of the landmark bill, stressing that the law will be a major turning point for the return to strong economic growth and financial system stability. The President also commended the National Assembly for ensuring its smooth passage in record time..
As would be expected, investors reacted spontaneously with prices of banking stocks soaring higher on the Nigerian Stock Exchange(NSE) as news of President Jonathan’s assent to the AMCON Bill hit the market. Investors moved swiftly to mop up available banking sector shares on offer particularly those in which the CBN had injected an estimated N620 billion following its intervention last year.

This development coupled with the improved earnings posted by some of them for the last financial year raised investors’ expectations that perhaps the worst may have been over for the institutions whose prices have since hit the trough. And as part of ongoing efforts to reposition the banks in readiness for the new regime, management of five rescued banks said they have recovered an estimated N480billion from their classified loans portfolio.

Daily Sun investigations, however, revealed the princely sum did not come cheap, but was the result of a combination of a potpourri of strategies, including the use of debt collectors, the anti-graft agencies and security apparatus particularly the Economic and Financial Crimes Commission (EFCC) as well as the efforts of individual bank personnel deployed to the field in search of debtors. Observers believe that more recoveries are likely before the commencement of the AMCON Law by September this year.

With this pace of loan recoveries, many have been querying the rationale behind the setting up of the law.
However, the World Bank Country Director in Nigeria, Mr Onno Ruhl, told Daily Sun in Lagos that AMCON would further strengthen the and economy that have been wrecked by huge non performing loans.
The World Bank, boss who called on all stakeholders to support the initiative, noted that with the benefit of hindsight and based on his varied experience from other countries where it had been experimented, the asset management company initiative would take the nation’s banking sector to the next level.

His concern, of course, was that appointment to key management positions in the organization must be professionally done if the desired success was to be achieved. Elsewhere, other commentators have commended the Federal Government, the CBN and the Federal Ministry of Finance as well as other stakeholders that played roles toward the realization of the AMCON law. For instance, former President of the Chartered Institute of Bankers of Nigeria, (CIBN), Mazi Okechukwu Unegbu told Daily Sun that its implementation will obviously have a salutary effect on the banking industry and the economy.

Unegbu described the coming of AMC as a good development that could help the Nigeria ’s financial market to recover faster. Former Managing Director of defunct Citizens Bank Plc, also noted that although the banking community has been living with the euphoria that AMC will erase all the problems afflicting the banks, it was important that the CBN convened a meeting of the Financial Regulators Consultative Forum to work out modalities for its implementation. At the same time he contended that in as much as it will help the financial sector to recover, it is not a guarantee against the usual risks associated with the banking industry.
According to him, Nigerians would be better for it if the regulators can guard their utterances by quietly supervising the industry instead of talking all the time.

He warned that careless utterances by regulators could trigger panic and suspicion among the banking community, a development he said would not be healthy for the economy and the financial system.
The ex-bank chief, who is also the Chief Executive of a stock-broking firm, said that at the banks are already discussing with debtors in the capital market, advised that the ongoing negotiation should also be extended to debtors in telecommunications, energy, and manufacturers so that all stakeholders will be carried along.

On what should be the focus of bankers at the moment, Unegbu advised that “banks must now come down to do professional banking and not the noise making that we see them making,” stressing that the problem that led to the current impasse was because banks were considering the ability of their clients to pay back.
He further stated that banks need to partner with their debtors by relaxing some of their hardline stance and collect whatever they can to move ahead.

Another stockbroker, Mr Patrick Anene, believes that the issue of compensation for losses incurred by all parties to merging in the financial market must be squarely addressed by the CBN if the AMCON law was to achieve its goals. According to him, the apex bank must ensure that brokers who lost their investment through merging loans are also compensated under the implementation guideline, so that everybody would be seen to have been carried along.

Anene argued that the loss of all their collaterals including share certificates and personal assets offered to guarantee merging transactions had left many stockbrokers in serious debts. He explained, for instance that many even sold their personal houses and properties to raise additional liquidity for investors to buy shares in anticipation of sharing capital appreciation and recouping their investment at the end of transactions cycle.
He regretted that this never came as the whole plan crashed with the global financial crisis hitting hard on quoted investments in the Nigerian capital market.

Anene said that it would be unfair for the apex bank to provide liquidity through AMCON for banks and investors without mitigating the losses suffered by stockbrokers who are key players to the entire transaction. He said, “brokers may feel betrayed if AMCON implementation guideline fails to address the loss suffered as a result of the loss of their investment because by virtue of merging facilities involved, all three parties, banks, investors and stockbrokers have all lost their investments in the transactions and issues pertaining to compensation should be fairly administered in the interest of all parties involved.

It would be recalled that the Nigerian business community lost over N1trillion in the capital market through merging transactions, a development that triggered prolonged liquidity constraint in the nation’s capital market. However, the AMCON law is considered as part of overall strategies of the government to boost liquidity in the financial market and to free banks’ balance sheet of huge toxic loans to enable them resume lending and provide other financial intermediation services to the business community.

In his reaction to the AMC law, former director-general of the Financial Institutions Training Centre (FITC), Dr Oladimeji Alo, noted that the signing of the law was a major achievement for the CBN and the Federal Government of Nigeria, as it would ease liquidity in the economy and banking industry in particular.

According to him, the passage of the bill into law now means that the bad assets of the banking sector will now be bought at a premium by AMCON and restructured to make funds available for banks to trade with.
Having said that, Alo noted that what was critical to achieving the dreams for which the firm was set up was for it to be allowed to run as a commercial venture devoid of government meddlesomeness. He then suggested that the company should be allowed to run professionally without being bugged down by bureaucracy and red-tape.

“On the composition of its board and management, one hopes they will be made up of competent and professional hands.” He expressed optimism that the Federal Government would not turn the AMC into another parastatal that will be flooded with political appointees, stressing that it was only when the company was manned by professionals that its goals can be attained. He stated that the problem with successive Nigerian administrations was that they often create institutions that are ends in themselves, expressing confidence that the problems that erupted with the government will not mishandle the present opportunity
The question on the lips of most commentators remains whether the coming on stream of AMCON will signal the end to all the woes of Nigeria ’s banking industry.

For Mazi Okechukwu Unegbu, Nigerians should not live in the euphoria that an end has come to the woes of the rescued banks, because it may not automatically translate to that if the regulators fail to come up with an appropriate framework for its implementation. For banks, he contended that this is the time for them to turn a new leaf and do away with their penchant for much talks and public relations stunts that do not deliver value to the customers. Unegbu also stated that the AMCON regime would require some flexibility that will involve making concessions on some of the bad loans. On how the development can impact on the bond market to enhance its depth, he contended that the current structure of the bond market does not encourage the participation of small players.

According to him, the present structure only permits the participation of a few investors with resources running into billions of naira, as small players rarely have the opportunity to play deep in the bonds market.
Even as shareholders of the affected banks tango with the CBN over its planned recapitalization, sale or acquisition of the institutions, issues of pricing of the assets have become quite topical for some time.
While for instance, the AMCON law provides for the purchase of the non performing risk assets of the banking industry in order to clean their balance sheet and position them to resume lending to the economy, many are still concerned about modalities for arriving at an appropriate value for these liabilities.

Only recently, the CBN Governor, Mallam Lamido Sanusi, stated that the company would have the power to evaluate the assets on ground and ascribe values to them, using a standard valuation models. With the issue of toxic assets now seemingly resolved, another question that will dominate discussions within the industry over the next few months remains the recapitalization of some of the embattled banks.

Commenting on the recapitalization of the banks, President of Progressive Shareholders Association of Nigeria, Mr Boniface Okezie regretted that it was taking so long for the apex bank to take a decisive action on the matter. Okezie decried what he called the double speak of the CBN governor, who he noted, had on several occasions, canvassed for the nationalization, privatization and sale of the banks to foreign or indigenous core investors, stressing it was high time the CBN boss took a definite line of action to save the banks from further degeneration.

“Nigerian shareholders don’t know what the CBN intends to do with the banks because Sanusi is not carrying us along. All along, we have heard him say he is going to nationalize and privatize the eight banks, but we can’t see anything happening in that direction in the past nine months since he came on board. We have made him to understand that any measure that excludes the original owners of the banks would amount to an illegality.

Okezie said Sanusi and the CBN must allow directors of the banks to search for core investors within or outside the country who can bring in money to recapitalize the institutions, stressing that was the only way the companies can move forward. But in response to the shareholders concerns about their role in the recapitalization process, Managing Director of Afribank Nigeria Plc, Mr Nebolisa Arah, while unfolding the bank’s restructuring template recently, stated that the board of various financial institutions were already working with the CBN and financial consultants engaged to design an appropriate capital raising options for them.

According to him, the financial consultants have since concluded initial due diligence on the banks while another round of review would soon be conducted before the presentation of final report to stakeholders to enable them select their preferred core investors. Arah said that his major assignment at the moment was to boost customers’ confidence and improve margins of return to shareholders, stressing that CBN has been quite supportive by providing the enabling environment for owners of the bank to select prospective core investors based on due diligence report conducted.

He explained: “Of the three most critical tests that a bank is often subjected to, capital test is a major one and that is why we believe we need to recapitalize as soon as possible to enable the bank do the kind of businesses it wants to do and deliver greater value to its stakeholders.” He argued that with the impact of provisioning on shareholders fund, it would have been difficult for stakeholders to lay any claim to the shares of any of the eight banks without the CBN intervention, adding that the process has raised the hope of investors in the institutions that the future could indeed be guaranteed.

The Afribank boss noted that the CBN’s intervention has given shareholders of the bank some confidence and hope of sharing from the resources of the organization, as opposed to a process of outright liquidation where all stakeholders including depositors could lose their investment and deposits. However, stakeholders have agreed that the coming on stream of the AMC is expected to add fresh impetus to the CBN’s economic rejuvenation efforts as most of the embattled banks would have their balance sheets cleared of festering ulcer created by bad loans.

For shareholders, the AMCON law opens another vista of opportunity for shareholders to assert their ownership status in the banks after the elimination of toxic assets from their balance sheet. For instance, while most of the banks have been unable to pay dividend to shareholders due to extant provisions of Companies and Allied Matters Act on amortization of non-performing debts, the take over of the bad loans may provide an opportunity for them to resume payment of dividends to shareholders again.

This has been the bane of most shareholders over the past few months when the CBN rolled out its reform package for the banking industry. The hope of all stakeholders in the financial sector is that Nigeria’s foray into AMCON experiment will not be another wasted venture that will be cited in future when the list of failed projects is being displayed.

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