The Asset Management Corporation of Nigeria is set to conclude the first phase of its assignment. The Managing Director/Chief Executive Officer of the corporation, Mr. Mustafa Chike-Obi, says, though the aggregate face value of the non-performing loans to be purchased in the first phase is about N2.2tn, AMCON is buying them at an appropriate price of between N800bn and N1tn. He spoke in an exclusive interview with YEMI KOLAPO in Lagos on Friday. Excerpts:
How easy is this job of taking non-performing loans off the balance sheets of rescued and non-rescued banks?
The job is an evolving one. It is a lot of hard work, but it is rewarding. All the agencies that we have had to deal with have been very helpful and we have had nothing but cooperation from the key players - the National Assembly, the Central Bank of Nigeria, the Ministry of Finance, and in some cases, the Presidency - have been very helpful. We‘ve also had detailed conversation with all the banks.
How far can AMCON go in making the rescued banks‘ balance sheets healthy again?
AMCON cannot save the banks by itself. The responsibility for saving the banks lies largely with the CBN and the banks themselves. AMCON is just one of the many tools available to the nation to help the banks get back on their feet. So, we can talk about what AMCON can do. People are not generally aware that it takes a lot of effort to have a non-performing loan that requires a lot of management. When non-performing loans get to the level they got to in some of these banks, it is a full time job. All the senior managements spend their time to deal with it and it affects their ability to do other things. What AMCON is trying to do is to take off those NPLs from the banks and give them some liquidity and capital. That should free them, hopefully, to attend to the essential business of lending to the economy. When credit starts flowing again, the banks will do better and the nation will do better.
How long does AMCON have to make this happen?
AMCON has a long time to restructure these assets, re-perform the assets that can be re-performed and manage those assets that are eventually acquired from the banks. We have a 10-year shelf life; we have long-term funding and we can take our time to deal with these issues.
Having concluded loan purchase deals with most of these banks, how would you assess the NPL problem in the banking sector?
There are many types of non-performing loans. The NPLs we are addressing in this first phase are those of the rescued banks and the margin loans of all the banks. We are expected to deal, in this regard, with all the banks. So far, we have had submissions from 20 banks. Two banks are not taking part in this exercise because they do not have any non-performing loan of any magnitude. They are Standard Chartered Bank and Citibank. We are awaiting submission from two other banks and they have very good reasons for not submitting yet.
Our estimate of the amount of loans we will be buying in this first phase is in the neighbourhood of between N800bn and N1tn. And we are pleased to say that, from the submissions we‘ve received, we are in that range. It is important to note that the amount we are paying for these loans is different from the face value of the loans. The aggregate face value of those loans is about N2.2tn. We are buying them at an appropriate price of between N800bn and N1tn.
Can you explain again how you arrived at this final value?
We have published the methodology in papers. But I will go over it again. Non-performing loans, backed by shares of listed companies, are valued at an implied premium of approximately 60 per cent on the 60-day average of recent prices, ending November 15, 2010. For loans backed by other assets, not shares, we are taking the market valuation from the banks, subject to a review by AMCON within 12 months. For loans with no security or those with ineligible securities, we are paying five per cent of the principal value. We are buying the assets and we are giving them bonds in exchange.
What is the end process going to be like?
The end process is that we take delivery of the non-performing loans, and the banks, instead of being stuck with illiquid, non-performing assets, have bonds that they will cash as they make new loans, and use the proceeds to fund the new loans. They can create new portfolio of loans in line with CBN‘s prudential guidelines. And as they make loans, they will be able to fund them.
Do you think investors will be willing to do fair business with the banks, considering the magnitude of non-performing loans that will be taken off by AMCON?
The investors are savvy investors. They know how to value an asset, be it a bank, be it a building, be it a business. They are smart investors. They know what they are bidding for, and we believe that these banks are okay. But we need to keep in mind that the value of those rescued banks lies in the fact that the CBN has kept their licences, guaranteed their inter-bank takings and guaranteed their deposits. Without these supports, those banks have no value. They have negative shareholder capital, and if left to themselves, will end up with the Nigeria Deposit Insurance Corporation and the shareholders will end up with nothing. It is of interest to the system that these banks are rescued and made healthy again. But this is going to come at great sacrifice to all stakeholders - shareholders, the taxpayers, the CBN, Ministry of Finance, AMCON and everybody.
Do you then think rescuing the banks is worth all the trouble?
There is no doubt about the answer to that. What people do not understand is that, at the height of the problem, the market capitalisation at the Nigerian stock market was about N4.5tn. If you take out the new listings, principally, the Dangote listing, it is now up to somewhere around N7tn. The support that the financial system has, has raised the market capitalisation of the stock market from N4.5tn to about N7tn. Nobody mentions that in their calculations.
Nobody talks about what would have happened if the banks had been allowed to fail. But I can assure you that if these banks had been allowed to fail, we would be looking at a lower market capitalisation of about N3tn or even lower, instead of the N7tn that we have today. So, it is definitely worth it. In most developed countries like the United States, Europe as a whole, and in places like the Indonesia, China and Vietnam, they‘ve all had these issues and the governments have rescued them. So, this is not something Nigeria is doing blindly. In my opinion, the intervention has been a great success so far.
The alternative would have been terrible; people would have lost confidence in the banking system; depositors might have made a run on the banks; we might have had total financial chaos. These are not acceptable alternatives.
Is it not possible for the banks to have huge non-performing loans and still get out of the crisis without necessarily going through these reforms?
There is a study that says that once a bank has non-performing loans in excess of 10 per cent; its ability to even survive is severely threatened. Here, we are talking of cases where banks have NPLs in excess of 40 per cent, 50 per cent or even 60 per cent of their portfolios. There may be a case or two where banks may have high value of non-performing loans and they will still survive. But they will need to be recapitalised and it must be an isolated case. But when you have almost half of your banks in that situation, you can‘t allow it to continue.
Has there been undue interference by politicians in the operations of AMCON? Do you have the necessary independence to achieve your aim?
Independence is one thing, cooperation is another thing. Yes, we have the independence we need to perform, but we need cooperation from a lot of agencies. We need the cooperation of the CBN, the Ministry of Finance and agencies of the Ministry of Finance like the Debt Management Office. So far, we have received nothing but 100 per cent cooperation. The politicians, by their nature, should ask questions and some of them have asked questions. I have treated these questions as key questions seeking information. I‘ll try to respond to these questions and answer them as well as I can. Still, I cannot say that there has been government interference from anywhere. Maybe time will tell.
How has the task been, considering the short period you have to purchase the NPLs?
We are doing things ourselves and it is a lot of work. I tell you, it‘s very hard. But that is not the question. When we are established and we get all the things that we need to function, then I can answer the question well. Right now, one person is doing two or three jobs. I‘m involved in reading documents that I would not normally be involved in reading. So, it looks hard right now, but it is part of the development process. When we have all the processes in place, it will be a lot easier. There is work to be done and we will do it as well as we can. What I want to say, however, is that it has been very satisfying getting things to be done in a way that helps the economy as a whole. If we did not do this, the banks would have had a harder time. If the banks have a harder time, their debtors will have a harder time. If their debtors have a harder time, the economy will have a harder time and new businesses will not develop. So, we‘re helping in stages and that is satisfying, that is what keeps all of us going.
I would add that, as we speak, the top management of this corporation do not have their compensation packages. We asked for it to be studied before we recommend it to the board. So, we are working without any compensation package right now. It‘s okay because we are a new organisation and we want to get it right.
By the end of the first quarter of next year, how much work do you think would have been completed?
We have three stages of work. One is what I call the acquisition of the NPLs. Right now, we are in the acquisition stage. When we acquire these loans, we will then need to sit down with the debtors, what I call the restructuring stage. We sit down with each one of them, understand their situation and try and get to a point that is helpful to them, but also responsible to the taxpayers. Inevitably, there will be some assets that we will acquire and we have to manage these assets in such a manner that will minimise the cost of resolution.
We are in the first stage now, which is the acquisition stage. That should be over by the second quarter of next year. But as we acquire loans, we will start the restructuring phase. That will probably go on till the end of the third quarter of next year. By the end of the third quarter, the loans that we cannot restructure will result in us getting some assets. When we get those assets, we are going to manage them for a while. Yes, there is work to be done, but in different stages.
Does the corporation have the capacity to get these done within the time frame?
We will have the capacity as we go along. Right now, at the acquisition stage, we don‘t need so many employees. We need more than we have, but we don‘t need so many. When we get to the restructuring stage, we would have developed the required capacity for that stage.
Don‘t you think you may face serious challenges trying to resolve the NPL cases of all the banks at the same time?
It‘s not going to be difficult. We have a formula for the margin loans and we have prices for all listed securities. For loans secured by things other than listed shares, we have time to deal with the issue, so it is not going to be difficult at all.
What records would you say earned this job for you?
I can‘t really comment on that, but I would say that I have been at senior levels in investment banking, banking in general and asset management for 26 years. I assume my experience is good enough for them. I‘m flattered and honoured that people have confidence in me and I will do my best to justify the confidence reposed in me. My first job was at Chase Merchant Bank in Nigeria. So, I know a number of the bankers here. My finance credentials are very strong and I hope I don‘t let anybody down.
Critics of the CBN‘s reforms have said that the banking sector crisis could have been resolved in a better way and that the country might have achieved a better result.
I will give you my professional opinion and my personal opinion. My professional opinion is that it was a serious emergency and something had to be done. What was done was, in my opinion, the only way to do it. If there was a serious emergency that would have taken down the Nigerian financial system, something had to be done, and I believe that the actions taken were absolutely correct.
As evidence, the US Congress invited the CBN governor and the Director-General of the Securities and Exchange Commission, Ms. Arunma Oteh, to come and talk to them about the steps they took to resolve the banking sector crisis. It is unprecedented; it hasn‘t happened before. The US Congress rarely invites foreigners to speak to them on issues like that. And the commentary was, ‘we wish we had someone like you here‘. The feeling was that every country had the crisis and that the handling of the Nigerian crisis would rank as one of the best forms of crisis management. That is my professional opinion.
My personal opinion is that people who talk about this always talk about style and they will never tell you what the alternative should have been. Those are irrelevant. The important thing is that something had to be done and it was done. Everybody has different styles of doing things. But the action was solid, necessary and very well executed.
Some shareholders have continued to criticise the reforms based on the style. What value is AMCON planning to give them?
That is what I don‘t understand. If people have entrusted their wealth in the hands of a set of managers, and those people ran their money to the ground through bad loan, bad management, ignorance and excessive risk taking, then those are the people they should direct their anger at. Instead, they are focusing their anger on the people, who are trying to give them something back out of what they have lost. They‘ve lost it all. All we are doing is to give them something back. They can‘t get all what they had, but they can get something out of this exercise. They don‘t say a word about the people that have driven them into the ditch; they are attacking those who want to help them. It‘s the most amazing thing in the world.
It is almost like you are in a car, and the driver is drunk and drives you into a ditch. And then you turn around to attack the people, who brought in an ambulance to help you get out of the ditch and put a bandage on your arm. That is exactly what the shareholders are doing and I don‘t understand. But it must not stop us, we have a job to do and we will do it to the best of our ability.
How do we avoid such crisis in future?
I think the shareholders should have more say in the governance of the institutions. The CBN has a role to play as the regulator and they have issued the prudential guidelines. The managers themselves must understand that they have a responsibility and that they must do things that make sense. If we all play our roles properly, there won‘t be repeated crises.