With the first quarter 2012 results from commercial banks, reflecting a return to profitability, Obinna Chima examines the intervention of the Asset Management Corporation of Nigeria (AMCON) and wonders if it has really paid off
Few years ago, the stock market boom, which saw the Nigerian Stock Exchange (NSE) market capitalisation at its peak of about N13 trillion in 2007, lured a lot of people into the world of finance.
Fishermen, mechanics and a lot more people of diverse background and with little or no knowledge about finance and investment got into the stock market and speculated on equities. This led to a phenomenal growth in credit risk assets created by the financial institutions between 2007 and 2008, as prices of equities rose sharply and investors enjoyed impressive returns on their investments. However, those days were soon replaced with gloom and despair as the stock market growth could not be sustained.
This was largely attributed then to the fact that the growth in the market was not accompanied by good practices. There were weak risk management, weak corporate governance, such that the growth in those assets resulted into assets that deteriorated in terms of quality and pay-back.
Those lapses caused the Central Bank of Nigeria (CBN) to intervene in the banking sector in 2009. In 2009, the CBN conducted a stress test which revealed huge capital liquidity failures and corporate governance weaknesses in some banks. This is said then could cause systemic risk in to the industry and the economy in general.
This led to the creation of Assets Management Corporation of Nigeria (AMCON). AMCON, which was created in the last quarter of 2010 is jointly owned by the ministry of finance and the CBN.
The CBN intervention led to the removal of some bank chiefs and the bailout of eight banks. Since then, five of the affected banks have concluded their merger and acquisition agreement while the process for the sale of the three commercial banks that were acquired by AMCON is on-going.
However, with 16 months into its operation and with the positive first quarter 2012 unaudited accounts so far released by most commercial banks, the Managing Director/Chief Executive Officer, AMCON, Mr. Mustafa Chike-Obi, strongly believed that the bruises that were sustained by investors in the capital market are gradually healing with the resolution of the banking crisis.
He argued that today, the Nigerian financial system “is sound and there are no more crises.”
The AMCON boss explained: “We can say very confidently that there are no more crises. We can even see that from the extra-ordinary earnings announced by banks in the first quarter 2012. We will like to be praised for all of those earnings and some credit would also be given to the management of the banks as well.
“But the environment is better, the bankers are now focusing on real banking and we hope that foreign and local investors will take notice. Nigerian banks today are very well capitalised, very well managed and very liquid. As a capital market expert, I advise investors to take a good look at banking stocks as it would be very rewarding.”
In order to further expose to stakeholders what the corporation had been doing, AMCON recently organised separate road shows in New York, Boston, London, Abuja and Lagos.
The role of the corporation in the economy has since been reviewed by various bodies such as the International Monetary Fund (IMF), Standard and Poor’s Ratings Agency, Fitch Ratings and National Assembly on several occasions. “Our mission was to help sanitise the banking industry. The situation in the banking industry was extremely dangerous and there was a real danger that the Nigerian financial industry would have completely collapsed. And AMCON was established as a long-term solution to the crises.
“AMCON’s job was to reform institutions and stabilise the banking industry. But the creators of AMCON also did one more thing - they asked AMCON to also tackle the restructuring of the bad debt. They were 12,000 individual loans in all and we had the mandate of approaching it with a view of also stabilising the economy. So in dealings with debtors, we do not approach it with a liquidation mentality.
“We have situations where it would have been better for AMCON to liquidate the company and take their assets, but in consideration of employment, the role they play in the economy, the choice was therefore to restructure the loans and in some cases, extend further credit to the companies so that they can continue with their role in the economy. So we do not approach debt with the idea of killing businesses, but with the idea of preserving businesses. That makes our job even more complicated. But it integrates into the economic restoration of the Nigerian economy,” Chike-Obi declared.
According to him, in collaboration with the regulators in the banking industry, AMCON has succeeded in creating an environment where banks can operate soundly.
He added that they were also proud that the federal government and taxpayers did not bear the cost of the resolution of the crises.
Since its creation, the corporation had bought Eligible Bank Assets (EBAs) in three tranches in the Nigerian banking industry as well as provided financial accommodation to eights institutions.
The EBAs comprises of non-performing loans (NPLs) as well as systemically important loans in the Nigerian banking sector.
Executive Director, Finance and Operations, AMCON, Mrs. Mofoluke Dosunmu, explained that the first purchase, which was done in December 2010 was for the corporation to buy all NPLs that had to do with the capital market as well as in all the then eight rescued banks. The next set of purchase was done on April 6, 2011 while the last was done on the 28th of December 2011.
That last purchase was to finally clean up all the NPLs in the banks’ books as well as to take out loans that were systemically important. AMCON purchased total EBAs worth N4.02 trillion at a price of N1.76 trillion.
Dosumu added: “The sources of funds open to AMCON are in three folds. First, is our share capital of N10 billion which was created by the CBN and the Ministry of Finance. Thereafter, AMCON issued N500 million debentures, fully subscribed to by the CBN and then we issued zero coupon bonds which we used in purchasing all the NPLS, EBAs and the recapitalisation of financial institutions in Nigeria.
“The zero coupon bonds are three-year in tenor, guaranteed by the federal government, they qualify as liquid assets and are fully registered on the NSE. These funds have been used to buy EBAs from financial institutions, recapitalise the three banks presently owned by AMCON and provided financial accommodation to the five banks that have successfully gone into mergers and acquisition arrangement. A small portion of this is used for AMCON’s operations.”
Listing of Three Nationalised Banks
Chike-Obi also disclosed that the corporation is considering listing the shares of Keystone Bank Limited, Enterprise Bank Limited and Mainstreet Bank Limited on the Nigerian Stock Exchange (NSE) before selling them to prospective investors.
He said the plan, was one of the several options it was currently considering, adding that, the option would give investors in the country the opportunity to invest in the financial institutions.
He however urged the management of the three commercial banks to start lending to the real sector, insisting that they currently have “too much liquidity.”
Chike-Obi put their respective liquidity position, currently, at about 90 per cent.
He explained: “And I say this very clearly, one of the options available to AMCON is to take these institutions public, so that the Nigerian public can have a chance to invest in them. So, we want to look at all the options before we start thinking of who the ultimate investors would be.”
The AMCON boss also revealed that11 financial advisers had been shortlisted out of a total of 44 that expressed interest to work with AMCON on the evaluation of the worth of the banks and on how to best to sell them.
According to him, in the next six weeks, the firm(s) that qualified as its financial adviser(s) would be announced.
“The process is that we asked for expression of interest and we received 44 expression of interest to act as our adviser. We have since shortlisted 11 and we have sent out a notice to the people who were shortlisted and also to those who were not shortlisted.
“The shortlisted parties will receive detailed Request for Proposal (RFP). In that proposal, we will specify exactly what we want them to do and we will ask them to give us their fees. It is based on the RFP results that we can pick the advisers. So, we are probably four to six weeks away from picking the advisers. But again, we want the process to be transparent, so that everybody understands. So, we are doing this thing very transparently. Hopefully four to six weeks, we will announce the adviser,” he declared.
Chike-Obi further disclosed that over 20 different bodies – banks and other investors, had expressed interest in the acquisition of the three banks listed earlier, stressing that the financial adviser(s) would evaluate and determine the value of the banks as well as evaluate all the options available to AMCON.
“And we have to keep in mind that it must be a transparent process that every Nigerian will look at and say we have done fairly. We don’t want anybody to think that these banks were taken over and handed over to special interests. It must be a very transparent process.
“Secondly, AMCON must get the best returns on its investments. We are not a charity organisation; we want the best returns on investment. Thirdly, it must be done in the interest of the financial system. And that is where the Central Bank of Nigeria (CBN) comes in.
“We must make sure that whoever takes over these banks ultimately is fit and proper to run a bank, we must know where their money is coming from, and we must know that the management is going to be sound,” he said.
He insisted that the banks no longer live on the CBN’s support saying that:
“What we are telling them is to start lending, and start creating assets. That is actually where the concern is. They are sitting awash with cash, which is why they are buying government securities. So we want them to buy less government securities and make more loans to the real sector.”
An analyst at Profund Securities Limited, Mr. Chijioke Obiagwu, argued that the crisis was gradually over.
Obiagwu noted that the entire banking reform was to help propel the growth of the Nigerian economy.
He added that the mergers and acquisitions, which some banks had entered into would also help stimulate growth in the industry and also reduce their cost of operation.
“The reform process was very good because the CBN allowed the banks to work out their own strategy without imposing it on them. Some of them merged, while brought in foreign investors. I think both strategies had helped the industry,” the economists said.
But the Deputy Governor, Financial System Stability, CBN, Dr. Chiedu K. Moghalu, who also concurred that the crisis in the industry was over, however advised operators to remain cautious of risk management.
Moghalu warned: “Risk is a significant and inevitable aspect of business activity in a market economy. Risk taking is an integral part of and constitutes a major characteristic of banking business.
“Furthermore, the CBN is developing a framework for the resolution of banking crisis in future, with strong scenario planning. This is in addition to a strong macro-prudential framework that anticipates and addresses the several macroeconomic imbalances to which the banking and wider financial system in Nigeria is vulnerable, including global economic dynamics.”