| Banks crisis:
Asset Management Company to the rescue?
By AMECHI OGBONNA and CHIMA TITUS NWOKOJI
Monday, November 16, 2009
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•Mukhtar
Photo: Sun News Publishing |
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If there is one problem that has suddenly turned banking
business into a nightmare for some operatives in recent
past, it is indeed the phenomenon of bad loans. It has
become a festering sore that has made scores of upwardly
mobile professionals to become permanent guests of the
anti graft agencies in the country, while sending the
institutions hitherto managed by them to their early
graves.
But for the chain of events that led to the collapse
of several financial institutions around the globe,
not many analysts could believe that America’s
leading financial powerhouse; Lehman Brothers could
be down and out at the weight of sub-prime loan rackets,
given its gargantuan profile in international financial
matrix.
For the Nigerian market, the menace of toxic assets
of banks is now like a bone in the throat of all the
regulators who have been looking for an easy way out
to redeem the traumatized institutions. Even before
the appointment of the incumbent Central Bank of Nigeria
governor, Mallam Sanusi Lamido Sanusi, his predecessor
Chukwuma Charles Soludo did recognize that the nation’s
banks may not function optimally if left with the huge
stock of toxic assets towering so high in their books.
It was against this background that he then muted the
idea of setting up an asset management company that
will take the bad asset off the books of the banks to
enable them operate on a clean slate post consolidation.
According to the CBN plans, the company which would
be established by an Act of the National Assembly was
expected upon inauguration to inherit all the bad loans
hanging in the books of the banks. Regrettably, five
years after it was taunted to provide relief for banks,
the Asset Management Company has remained a pipeline
dream which no one is sure will ever see the light of
the day. But just recently Mallam Sanusi had informed
the Nigerian banking community of the Federal Government
commitment to fast track the establishment of the company,
citing a Presidential directive to the apex bank, the
attorney general of the Federation and the Federal Ministry
of Finance to work together to ensure the company become
a reality.
As Nigerians await the roll out of the AMC, some analysts
have continued to show concern over the strategies the
proposed firm intends to adopt in handling the huge
stock of toxic assets waiting to be taken off the books
of the 24 surviving banks in light of what the Central
Bank of Nigeria is doing to enthrone a stable banking
culture. Speaking last week on “the Nigerian banking
sector reform: effects on investment promotion”,
at the 4th Negotiation and Conflict Management Group
Summit held in Lagos, deputy governor of the Central
Bank of Nigeria Mr Babatunde Lemo, who represented the
Governor Mallam Sanusi Lamido, said the establishment
of the Asset Management Company will address systemic
liquidity squeeze and inhibition of credit growth.
He assured it will also enable banks to resume lending
to the real sector thereby stimulating economic growth.
Lemo added that it will reduce debt burden on operators
and allow liquidity to flow back to the market rather
than to debt service, while removing pressure on banks
to sell down shares to recover loans and impact the
capital market positively. The deputy governor’s
view merely re-echoed the refrain that Sanusi has been
singing over the past few weeks about the relevance
of the AMC as he prosecutes his reform agenda.
Only recently the governor had reiterated CBN’s
commitment to stand by all Nigerian banks and work with
their respective boards, management and other stakeholders
to restore the stability of the financial system and
thus ensure that our banks are able to effectively play
their role in economic growth and development would
never be shaken. In furtherance of the commitment of
the Federal Government to the growth and stability of
the financial system, President Umaru Musa Yar’
Adua has directed the Honourable Minister of Finance
and the Central Bank Governor to liaise with the Attorney
General of the Federation, the National Assembly and
other relevant stakeholders with a view to fast-tracking
the process of establishing an Asset Management Company.
When established, the AMC will operate with a share
capital of N250billion.
The formation of this company should facilitate an improvement
in banking sector liquidity, protection of the earnings
of banks from further erosion and a reduction of the
debt overhang on the capital market and its participants.
This should provide a much needed fillip for the revival
of the Nigerian Capital Market. Sanusi noted that the
conclusion of the bank audit exercise was an indication
that the CBN has come to the end of the first phase
of the process of restoring financial sector stability.
He stated that ongoing action will now focus on building
capacity within the regulatory regime; fast-tracking
the implementation of risk-based, consolidated and cross
border supervision frameworks; easing the flow of credit,
particularly to the real sector of the economy; improving
governance structures and practices in the financial
services sector; and improving confidence in the economy
in general. To achieve this Sanusi told Nigerians that
he was not afraid of any body in his quest to sanitize
the banking sector, stressing he will invoke the full
weight of the law to ensure that he exposes the high
and mighty and make them pay back what they borrowed
from the banking sector. But while Nigerians await the
takeoff of the scheme, there have been growing concerns
over its full impact on the economy.
One of such matters bugging the mind of some observers
would the pricing of these assets and the ability to
convert them to valuable assets at a time that the global
financial meltdown had rock the Nigerian capital market
to its foundation. According to Razia Khan, head of
Research Africa at the Standard Chartered Bank, the
short coming behind the idea of Asset Management Company
or bad bank is the fact that its assets may be difficult
to value. She said that as long as a bank’s balances
sheet remain weighed down by problem assets, credit
growth is likely to remain sluggish. She therefore contended
that an AMC cannot be the perfect solution under the
prevailing circumstance as some problem assets not limited
to margin loans may prove more difficult to value.
She stated for instance that the cost of financing an
AMC could well exceed the total cost of recapitalizing
the banking sector A review of the toxic assets of the
nation’s banking industry shows that out of a
total loan portfolio of N2.87 trillion, merging loans
accounted for N456billion, with Oil and Gas sector recording
a commitment of about N487 billion, while aggregate
non -performing loan accounts for the entire industry
standing at N1.14 trillion. This means that the volume
of debts hanging on the neck of the 24 banks is more
than nation’s appropriation account for 2009 financial
year. It is perhaps the sheer size of non- performing
loans that prompted CBN to demand for full disclosure
from banks on their toxic assets.
The bank has in two separate directives advised banks
to disclose the full extent of their exposures to oil
and gas, merging facilities and loans to other critical
sectors of the economy. However details of the last
CBN / NDIC audit on the Nigerian banking industry reveals
that loan loss provisions for Nigerian banks for the
last quarter of the year shows that Nigerian banks are
in dire straits. The records show for example that Access
Bank had a provision of about N30.89billion, Diamond
Bank N24.60billion, Ecobank N33.39billion, while First
Bank of Nigeria Plc made a provision of N29.50 billion.
Other banks that were affected by the gale of toxic
assets include GTB N24.96 billion, Skye Bank N32.billion.Sterling
Bank N10.84billion, UBA N41.07billion, Zenith Bank N26.14billion,
while Bank PHB provided for N16billion for the 12 months
ended June 30 2009 an increase of 253 percent over the
N4billion it provided for the same period last year.
Consequently the bank’s profit dropped by 44 per
cent, just as all other institutions recorded above
had their bottom-line plummeting against expectations
for the year. For instance First Bank’s non performing
loan of about N75 billion hit its profit so strongly
that profit before tax for 2009 fell to about N3.3.19billion.
With these unhealthy development’s, some commentators
have been wondering whether the establishment of an
asset management company can indeed eliminate or better
still minimize the phenomenon of toxic assets in the
banking industry. President of Finance Market Dealers
Association, Mr Wale Abe pointed out that the audit
of the 24 banks was a new dawn for the industry, stressing
that some of the findings would help put the operators
on their guard. Abe listed the huge uncollaterized loans
and lack of good risk management structures as some
of the errors that the banks need to urgently correct.
He also pointed out that most of the bad loans were
caused through insider abuses by bank management and
boards.
Many of the banks lacked quality risk management capabilities
while corporate governance principles were largely lacking.
The question now is whether the actions being proposed
by the authorities will actually eliminate the problem
of bad loans in Nigeria’s banking sector. Speaking
at a workshop in Kaduna recently, Director of Research
at the Nigeria Deposit Insurance Corporation (NDIC),
Dr J.G. Donli pointed out that bank distress is a phenomenon
that no one can stop in any economy. He stated that
regulation cannot stop banking sector distress since
it could be triggered by various factors including government
policy. Donli noted that the NDIC will continue to discharge
its functions of examining the books of the banks based
on the returns they make to it, pointing out that the
corporation’s duty as a risk minimizer was to
review their books and report back to their board and
management.
He noted however that if the board / management of any
of the banks decide to correct the errors noted in their
books it will save their institutions from paying the
ultimate prize which is liquidation. As at September
25, 2009, the first five banks had recovered more than
N110 billion of previously non –performing loans
while indications are that more recoveries are likely
in the months ahead. But according to Mr Henry Boyo
an economist, the Central Bank of Nigeria is to blame
for the mounting profile of bad debts plaguing the banking
sector. He wondered why the apex bank allowed the loan
situation of Nigerian banking industry to get to the
present frightening dimension before realizing it has
to float an asset management company. Boyo’s position
differs slightly from that of the former Minister of
National Planning, Ambassador Isaac Aluko Olokun who
see banks’ decision to deal settle the issue of
bad loans at this moment as a very courageous step.
He stated it would reposition the banks for sustainable
future growth in the nation’s competitive economy.
Akoroda Charles, a deputy director at the CBN hinted
that in order to halt this ugly trend, the CBN may review
other prudential threshold including the ratio of non
performing loan to a bank’s credit thus reducing
the risk in the industry. He contended that this would
serve as early warning signal that could enhance the
formulation of appropriate and timely policies that
would be complemented by full disclosure requirements.
Akoroda said the apex bank intends to complement these
activities with regular spot checks whenever it gets
suspicious reports from any bank. the focus has been
on liquidity, capital adequacy and corporate governance.
At the end of its special investigation of banks nine
of them including Fidelity, Access, Ecobank, FCMB, Skye
Bank, Stanbic IBTC, Standard Chartered Bank and Zenith
Bank were found to have adequate capital and liquidity
to support the level of their current operations and
future growth: The 10th bank – which is Unity
Bank—was adjudged to have insufficient capital
but not in grave situation because it has a healthy
liquidity position. The situation was however different
for Bank PHB, Equatorial Trust Bank, Spring Bank and
Wema Banks which said were in very grave situation prompting
its intervention.
The CBN will work with the banks to ensure a successful
completion of the recapitalization exercise, in addition
to assisting them in their recovery efforts. Speaking
at the World Bank meeting at Istanbul Turkey last month,
Sanusi said it that first round of intervention in August,
involved 10 institutions where 5 passed the stress test
while 5 others failed. The 5 banks that failed he pointed
out accounted for 90 per cent of the exposures at the
Expanded Discount Window. The second round involving
14 banks saw 9 institutions scaling through while Bank
PHB, Spring Bank Plc, and ETB as well as Wema Bank and
Unity Bank had issues to settle with the CBN.
According to Sanusi “our preference is to move
straight to from the tier 2 loan given to 8 banks to
private placement.” He noted that if these two
options fail, chances are that they would be systematically
liquidated to ensure that depositors get paid all their
money while the bank is gradually wound down. Secondly
the government can convert its stake into equity until
such a time its finds a buyer. He stated “ as
we said in a press statement, that the president has
given approval in principle the recommendation for an
asset management company we are going to work with the
ministry of finance and the National Assembly to bring
that to fruition as quickly as possible and we are now
moving to the next stage” Sanusi said the language
in use in the CBN is that these banks are on life support
and that the apex bank was committed to moving them
to a safe harbour by putting them on a life support.
“You have arrested the deterioration, you have
stabilized them, you make sure they are ready to go
back to competitive stage and then you gradually and
gently without much disruption to move them back to
safe harbour which might be injection of capital from
local capital market or from foreign banks but the or
a merger with a local banks or an acquisition by a foreign
bank”, Sanusi had said.
On his part, Mr Adetilewa Adebajo, an economist and
public affairs commentator said the argument should
not be an issue of whether the AMC was coming late or
not but one of what it is out to achieve for the banking
industry and the Nigeria economy. Only recently the
managing director of the Nigeria Deposit Insurance Corporation,
Mr Ganiyu Ogunleye highlighted some of the likely problems
that regulators of the industry are likely to face in
their bid to get the AMC off the ground. He argued that
“apart from the bad credit decisions highlighted
in some of the troubled banks, recent developments further
exposed the poor borrowing culture in Nigeria”.
While the ongoing effort of the EFCC on debt recovery
is appreciated, the long term solution is for borrowers
to appreciate that banks credit are largely funded from
depositors fund and that delinquent credit contribute
to illiquidity of banks.
In order to improve on borrowing culture the creditor
rights mechanism require a drastic overhaul through
appropriate legislation. The procedures for taking and
enforcing collaterals in Nigeria are most inefficient
as debtors easily frustrate creditor banks by abusing
the judicial process. The corporation had come across
debtors who would prefer to engage solicitors that could
protract cases in court for many years rather than make
efforts to resolve their debt obligations. Bank debtors
with such mindset constitute a threat to efficacy of
the proposed Asset Management Company (AMC)”.
But some stockbrokers who commented on the proposed
setting up of the AMC expressed some worries over the
real intentions of the government for the project. According
to Mr Peter Eluehike, Managing Director of GEE Capital
Investment Limited the planned establishment of the
company may further put the Nigerian economy on the
brink of collapse.
He stated that the government through the CBN has not
yet told Nigerians what it intends to achieve through
the policy. Eluehike’s views however corroborate
the opinion of other Nigerians who have since expressed
apprehension that the AMC may be a ploy by the government
to nationalize the troubled banks, by forcefully taking
away the shares of its legitimate owners. His views
are in line with what another chartered stockbroker,
and group head, capital market research and asset management
department of Capital Bancorp Limited, Mr Tajudeen Olayinka
who argued that if the setting up of the Asset Management
Company is to take off toxic assets that are in the
books of banks, it is a good development. But whether
it has come at the right time is the question begging
for an answer. To answer that, I would say it has come
rather, too late.
He said: “CBN asked the banks to clean up their
books. Having complied to an extent by writing off non-performing
loans, it is not very likely that the banks would prefer
to use that window as against more viable alternative
windows that will still preserve the value of those
assets”. He further noted that the CBN’s
stand is that the AMC will have a fund, and that fund
will take on those toxic assets and give cash to the
banks. That way, they will have some respite and continue
their business. But according to him, “the banks
have written off those assets already, so they will
not prefer this window. Some of those assets, especially
those that are related to stock market still have prospects
for future value. So, it would be in their own interest
to keep it like that and allow market to recover, so
as to reduce losses they have incurred. This can then
be written back into their books as profit in future.
But if they turn it in to the AMC, they will realize
the total loss immediately and the expected profit will
be lost completely.
If it had come at the beginning of the crisis many of
them would have preferred to use that window to ease
their liquidity burden. It could have be in their own
interest then, not now that they have written off those
assets from their books. It makes no economic sense
to use the AMC window now rather, they will prefer to
remain at the inter-bank window, and if CBN still allow
them to discount government securities, of course they
will also prefer that window.” The fear of the
voices opposed to the policy is that the Yar’
Adua administration may use the window to offer some
powerful politicians and money bags an opportunity to
acquire controlling stakes in some of the banks now
being repackaged. Another stock broker, Mr Oladipo Aina,
President of the Chartered Institute of Stock brokers
said the proposed AMC was a welcome development that
will bring relief to the capital market.
“We have said this before now that what the market
needs is liquidity and we recommended the injection
of cash into the market. For one reason or the other
our suggestion was not harkened to. But today, we have
been vindicated and we are happy because the market
will be better for it. The reforms going on in the market
are what we suggested since last year. However it is
better to be late than never” Aina said. For the
managing director of Partnership Investment Company
Limited, Mr Victor Ogiemwonyi, the AMC is the way to
go in an effort to save the capital market. He said;
“this has been my position since October 2008
when I first called for the intervention of the CBN.
I think the AMC idea now supported by the CBN is the
way to go as it has the twin effect of reducing supply
of securities in the market and stabilizing it until
it adjusts to equate investors’ demand and supply
of securities. The relief this will bring have to be
inclusive of investors and banks. Investors should be
relieved of current burden of debt while the banks are
to use the opportunity to clean out their balance sheet”.
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