AMCON, the Bad Bank and the N2.37 trillion Loss

23 Dec 2012

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AMCON MD, Mustafa Chike-Obi

Olabisi Williams

True news is colourless, but it comes out of the human prism in a spectrum of colours, some dim and depressing, and some bright and full of hope. In a country where people have been conditioned to associating mind- boggling profits with banks even when they are dying, news of the N2.37 trillion after-tax loss of the Assets Management Company of Nigeria (AMCON), has been received by in some circles with mixed feelings.

The other day, someone said, “so you see AMCON is a bad bank after all.” It was a bit confusing until he added, “so the physician should heal himself.”

It is interesting, even humorous, that a bank to save ailing banks would rather be called a Bad Bank. But truly, a bad bank is one set up to buy the bad loans of bank with significant nonperforming assets. By transferring the bad assets of the ailing institutions to the bad bank, the institutions clear their balance sheets of toxic assets. Shareholders and bondholders may lose money from this solution, but not depositors, that governments seek to protect.

AMCON was established on the 19th July 2010, when the President of the Federal Republic of Nigeria signed the AMCON Act into law to be a key stabilising and re-vitalising tool to revive the financial system by efficiently resolving the non-performing loan assets of the banks in the Nigerian economy.

Indeed, AMCON was modeled after successful international asset management companies, such as the KAMCO in Korea, and mostly closely to Malaysia’s Danaharta and Danamodal and NAMA in Ireland.  

Specifically, AMCON, wholly owned by the Federal Government, was established by the Central Bank of Nigeria (CBN) and the Federal Ministry of Finance with the mandate to soak up bad bank loans and help recapitalise the banks rescued by the CBN. AMCON became a necessity following the large volume of non-performing loans in the banking sector caused in part by the global economic meltdown and the failure of some local businesses.

The Corporation hit the ground running after the Senate confirmation of its board. After its maiden board meeting, it announced the approval for it to absorb 2.2 trillion naira ($15 billion) of bad loans from rescued lenders and margin loans from the wider banking sector.
From 2008, several attempts had been made by stakeholders – government, its agencies and the National Assembly – to stop the alarming decline of the stock market, but none provided the silver bullet. Worse, the gaping holes in the books of the banks disabled them from lending. Hope was dying!

This writer was one of those who clamoured publicly for government intervention. At last, AMCON was birthed, and more recently the N22.6 billion forbearance package announced by the Federal Government for indebtedness due to margin loans by stockbrokers.

AMCON has announced its first accounts since it was set up to absorb the debts of banks caused by over-exposure to a declining oil market and a slumping local stock market. And the accounts did show a N2.37 trillion naira ($15 billion) loss after tax.

Of course, the news peg of every annual account in the bottom-line of the balance sheet. The loss therefore raised prompt questions. Questions about the big size of the loss; how AMCON will refinance a 1.7 trillion naira zero-coupon bond at the end of 2013; and the ability to repay a total of 4.5 trillion naira government-backed bonds used to clean up the banking sector and whether the sinking fund will be sufficient in the short-term.

Also some shareholders have commented on the loss, describing AMCON as a time bomb. In an interview with a newspaper, the Progressive Shareholders Association described the Corporation as bomb which is set to explode at any time soon. Expectedly the association did show their interest in the nationalized banks. Shareholders are traditionally the loser group in the bad-bank solution.
However, AMCON has responded to these issues, assuring stakeholders about the needlessness to panic. On the size of the loss, Executive Director of Finance Mofoluke Dosumu, said: “The non-performing loans that we bought were four times larger. This shows that what was disclosed as NPLs (non-performing loans) on the books of the banks were below what we found when they started selling to us. We bought four times what we initially envisaged.”

According to AMCON Managing Director, Mustafa Chike-Obi, the loss was also because of the N5.6 trillion it invested in the three banks to secure depositors’ funds and other public investment in them and to enable the banks compete favourably with other healthy banks in the country.

Indeed, the breakdown of the interventions shows that AMCON recorded its biggest loss in the five banks it intervened in: Intercontinental Bank where it injected N561.583 billion and lost N557.983 billion, representing 99.36 per cent loss and 23.5 of total loss in all interventions; in Union Bank, it was exposed by N382.814 billion and lost N280.782 billion (73.35 per cent); Equitorial Trust Bank N64.516 billion exposure and N62.93 billion loss (97.54 per cent); in Oceanic Bank it injected N304.680 billion and lost N280.7 billion (92.13 per cent); and in FinBank it intervened with N154.7 billion. The loss through the five rescued banks accounted for 56.2 per cent of total loss by AMCON.

On the rescued banks, AMCON injected N300.673 billion into Keystone Bank Limited and lost N271.324 billion (90.24 per cent); Mainstreet Bank Limited got N425.562 billion but N383.947 billion was lost (90.22 per cent); and  Enterprise Bank Limited got N135.032 billion while N106.880 billion (79.15 per cent) was lost.

Chike-Obi assured that the corporation is healthy. He said he was confident AMCON will be able to refinance its bonds at maturity next year and it could also choose to retire them using the proceeds of its sinking fund.

According to him, Nigerian banks had also agreed to increase their collective contributions to a post-crisis “sinking fund” used to refinance the bank’s bad debts to 100 billion naira, up from the 60 billion naira they had already put in, and with a projection to hit N6 trillion in 10 years.

In fact, even without the assurance, it is hasty to make damning issues out of AMCON’s published loss. It has been observed that a bad bank in its life span changes dramatically from being at the outset basically a bank with a large number of loans to later in life a large asset-owning company.

Besides, away from the news peg syndrome, AMCON’s published accounts did show much more than the balance sheet. The annual report also contains the following: “Pursuant to its mandate and powers under the Act, AMCON completed the primary acquisition of N866.2billion of Eligible Bank Assets (“EBA”) from the 21 financial institutions on 31 December 2010, achieving this key objective within less than two months of commencing operations. “AMCON acquired a further N377 billion of EBAs in April 2011, from 22 EFIs as well as some N515 billion of systematically important loans in December 2011. EBAs were purchased at fair value prices, largely based on the underlying collateral value of the loans, which is in accordance with the AMCON Guidelines as approved by the CBN. 

“This resulted in a 56% overall weighted average discount on the gross value of EBAs required. AMCON acquired the EBAs through the issuance of zero coupon bonds as consideration to the EFIs. As at 31st December 2011, the total EBA portfolio of AMCON contained about 28,000 loans belonging to various sectors of the economy, providing stability not only to the banking sector, but also the real sector of the economy.

“AMCON was further tasked with the role of recapitalizing weak but viable banking institutions in order to protect depositor’s funds at these banks. In exchange for equity, AMCON injected over N1.5 trillion into 5 banking institutions (“Intervened Banks”) to restore their Net Assets Values to zero in order to facilitate the acquisition and or merger of these banks. AMCON was also invited by the Nigerian Deposit Insurance Corporation (“NDIC”) to capitalize the 3 Rescued Banks to ensure they met the minimum CBN Capital Adequacy Ratio”.
Outside the report, some of AMCON’s achievements are found in the saving of some 90 per cent of employees that would have lost their jobs in the banking sector.

The sector is itself growing. According to a Reuters’ report, “The banking sector has recovered sharply after the crisis with strong earnings drawing investors back to Nigerian shares following several years of turbulence in the local stock market that wiped 60 percent off their value in 2008.

“The index of Nigeria’s top ten banks has gained 17.5 percent so far this year to recover from a loss of 32 percent in 2011. The main-share index is up 33 percent”.

Also, first- half year reports of many banks showed increased lending. For example, United Bank for Africa (UBA), Diamond Bank and Skye Bank, showing that loans to customers from the three banks were up an average of 16.6 percent in January – June 2012 compared to the same period last year.

The beauty of the bad bank solution is that by separating assets of banks, bad assets are stopped from contaminating the good. Bankers say when the two are mixed, stakeholders are uncertain about the banks’ financial health and performance, impairing its ability to borrow, lend, trade, and raise capital. But all that said, it is obvious from the report and examples of some other bad banks that the bad- bank solution is not a quick fix, but it does work, and effectively too.

•Olabisi Williams is a Lagos-based writer and researcher.

Tags: Business, Nigeria, Featured, Bad Bank

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