As talks on Etisalat Nigeria’s $1.2billion bank debts continue to generate ripples,the issue of floating a new specialised company to soak up the non-performing loans (NPLs) in the banking sector, which has grown above the 100 per cent threshold, set by the Central Bank of Nigeria (CBN), has again come to the front burner.
The idea was first mooted last year when the ratio of non-performing loans to total credit rose to 11.7 percent at the end of June, from 5.3 percent at the end of 2015.
The apex bank, in a report posted on its website, then had noted:
“Credit risk is expected to trend higher into the second half of 2016 owing to increased loan impairments resulting from the depreciation of the naira. The inability of debtors to service foreign currency-denominated loans and bank exposures to the oil and gas sector were also factors.”
To worsen the situation, CBN last February, raised the limit on banks’ foreign currency borrowings to 125 per cent of shareholders’ fund, blaming the decision on the violation of its regulatory limit due Naira depreciation.
A circular entitled:Review of the Limit on Foreign borrowing by Banks, issued by the Director of Banking Supervision Department of the apex bank, Ahmad Abdullahi, olamented that the recent depreciation in the value of the currency had led to an increase in the Naira equivalent of foreign currency denominated borrowings by banks. A major consequence of this development was the inadvertent breach of the regulatory limit for foreign currency borrowings (75 per cent of shareholders’ funds unimpaired by losses) by some banks.
“To address this development, banks are advised to be guided by the following requirements regarding their foreign currency exposures: The aggregate foreign currency borrowing of a bank excluding inter-group and inter-bank (Nigerian banks) borrowing should not exceed 125 per cent of shareholders’ funds unimpaired by losses,” said Abdullahi.
Commenting on the bad debts, Fitch Ratings observed that “the operating environment for Nigerian banks is becoming increasingly difficult as recession, weak oil prices and exchange rate pressure combine to make it more difficult for borrowers to service their loans.”
Last July, in order to enable the banks clean up their books and help them comply with the five per cent NPL/total loans ratio threshold, the apex bank allowed them to hasten the write-off of fully reserved NPL.
“Fitch-rated Nigerian banks’ NPLs at end-June 2016 were reserved at 62 per cent and our ratings already factor in an assessment of loan loss cover adequacy. Setting up an asset management company (AMCON 2) to acquire the NPLs would in our view be a more significant and credit-positive measure.
“If successful, and depending on transfer pricing agreed, it could result in real improvement in the banking sector’s asset quality. Sectors experiencing difficulties include oil and gas, utilities, manufacturing and trading. AMCON 2 would follow AMCON, established in 2010. This company, funded by the issuance of Federal Government zero-coupon bonds, the central bank, and later by a levy on banks’ assets, removed the NPLs from the banking sector, making banks better positioned to lend to the real economy.
“AMCON continues to operate, having recovered 56 per cent of the value of total loans acquired from the banks. It also acquired failed banks and stakes in failed banks. Funding of AMCON 2 might prove difficult. Press reports suggest that the government intends it should be funded by the private sector, but convincing private investors to acquire the NPLs at a time of heightened economic difficulty might prove challenging,” said Fitch.
Then, CBN and the Nigeria Deposit Insurance Corporation (NDIC) set up a joint committee to discuss the plan.
Asked on its update, the Head, Communications & Public Affairs of the Nigeria Deposit Insurance Corporation (NDIC), Alhaji HS Birchi, said:
“It was discussed at the last(June) Bankers’ Committee meeting in Lagos. It is a private sector-led AMCON. That is what they call the second AMCON. The modalities are not out yet. You know the other one is government-led AMCON.It has a lot of problems because most of the NPLs (acquired) are not performing.”
When asked, Mr. Isaac Okorafor, the CBN spokesman, said he was not aware of any plan to float AMCON 2.
But is another AMCON necessary at this time? Mr Johnson Chukwu, the Managing Director of Cowries Assets Management Ltd, does not think so.
According to him, it would amount to an uphill task to float another toxic debt bank now.
His words: “It will be difficult to achieve that now. One, the funding requirement for AMCON 2, whose regulatory capital requirement has been reviewed by the government to N10billion. A N10billion regulatory capital will not be sufficient for it to make any effect on the economy. And then, the possibility of raising money to buy toxic assets in the current economic situation is very difficult. Today, you have to borrow long term.
“Assuming they even have the Federal Government guarantee, they will not borrow less than between 20 to 25 per cent.At such, it will be very difficult for them to hold assets for five or six years to work out.”
Recall that the current AMCON recovered over N760 billion within six years of its operations.
According to CBN, in its December 2016 Financial Stability Report released last April, the amount represents a fraction of its total Eligible Bank Asset (EBAs) purchase price of N1.75 trillion.
Giving the breakdown, the report states that, as at September, 2016, the corporation made total recovery of N78.76 billion for 2016, which was made up of cash recoveries, asset forfeiture and securities forfeiture.
“This represented a 90.2 per cent increase in the recoveries of N41.42 billion recorded in the corresponding period to September 30, 2015.
From its inception to September 30, 2015, the corporation has made total recoveries of N681.541 billion, representing 38.95 per cent of the corporation’s total Eligible Bank Asset purchase price of N1.75 trillion.” The CBN repot stated that the routine examination of AMCON was conducted during the second half of 2016. The examination focused on the management of the acquired and restructured Eligible Bank Assets (EBAs), the recoveries made, assets disposed and strategies for redemption of liabilities.
“The net carrying value of AMCON’s outstanding liabilities remained unchanged at N4.5 trillion at end-December 2016. However, the carrying value of its assets net of impairment was N624 billion7 at end-December 2016, down from N846.41 billion at end-June 2016 following recoveries realized and additional impairments booked by the Corporation. The gap between AMCON’s assets and its liabilities would potentially be covered through the Banking Sector Resolution Cost Trust Fund (BSRCTF) as well as credit recoveries and assets sales by AMCON. The BSRCTF realized total collections of N175.97 billion during the 2016 financial year while AMCON realized total recoveries of N139.04 billion during the year.”
At the time of its establishment in 2010, AMCON identified 10 banks with crisis in system asset and responded by the injection of N736 billion liquidity to buy up their assets. The original book value of the acquired non-performing loans (NPLs) was N4.02 trillion at a price of N1.76trillion with a commensurate issue of Zero Bond for the NPL acquired. Among the 10 banks, only three banks were unable to meet up and were finally acquired by AMCON and tagged as Bridged Banks: They are Mainstreet Bank, formely AfrBank; Keystone Bank (Bank PHB) and Enterprise Bank(Spring Bank).
The CBN report also raised a red flag about the rising NPL in the banking sector as NPL ratio moved from 11.7 per cent to 12.8 per cent at the end of 2016.
The report states:
“During the period under review, credit risk trended higher as the industry wide NPL ratio moved from 11.7 per cent to 12.8 per cent at the end of 2016 and non-performing loans grew to N2.09 trillion at end-December 2016, from N1.7trillion at end-June 2016. Total exposure of the top 50 obligors stood at N5.59 trillion (34 per cent) of total industry credit exposure of N16.29 trillion.
At end-December 2016, loans to the oil and gas sector constituted 30.02 per cent of the gross loan portfolio of the banking system as credit to that sector grew from N4.51trillion, to N4.89trillion. Loans to state governments declined marginally to N1.38 trillion from N1.4 trillion at end-June 2016.”