Sunday, September 14, 2014 4.53PM / Financial Derivatives Company Limited
Earlier on Friday, September 12, 2014, the Asset Management Company of Nigeria (AMCON) announced its financial results for 2013 in which it complied with the stringent International Financial Reporting Standards (IFRS).
While the financial loss was N625.88bn, the good news is that, the economic profit and the social benefits were approximately ten times higher.
The question asked is “why and how do economists compute and measure profit differently from accountants?” This is because economic definitions are wider in dimension and concept.
The True Economic Picture is Different
But this financial statement does not paint the true and entire picture. It does however raise an intriguing question which is “why are economists describing this result as an astronomical macroeconomic success and accountants calling it a loss?” It then comes down to the simple difference between how economists compute value and accountants keep their books. At the influential IMD business school in Lausanne, Switzerland, a common joke is that two guys were in a drifting balloon and found themselves in an unknown location, they then shouted out to a pedestrian down on the street below “where are we?” the man replied “you are in a balloon”. The older guy in the balloon said “that guy must be an accountant, as usual, he is 100% accurate but totally irrelevant”.
A cursory look at the Financial Statement reveals that shareholders’ funds reduced from -N2.55trn in 2011 to -N3.27trn in 2012 and to –N3.46trn in 2013. Equally, the Company made the losses of N2.37trn, N0.722trn and N0.635trn in the financial years 2011, 2012 and 2013 respectively. While losses are recorded for all the years, it is noteworthy that this has declined over time. Further, AMCON redeemed N4.5trn of bonds in the fiscal year 2013, which was partially refinanced by the CBN loan of N3.8trn at 6% p.a and its operating expenses were N121bn down by 40.6% from N204bn.
The IFRS accounting standards has made financial reporting more stringent and emphasizes the impairment and marking assets to market; thereby reflecting a more accurate picture of asset values. What AMCON has published are figures that reveal an IFRS compliant picture of its financial conditions. The performance of the country’s largest single financial stabilizing institution is much more revealing than the number suggest. The economic value added and stakeholder benefit analysis reflects a totally different picture in the economic scorecard. This includes the fact that as a stabilizer the nation as a whole enjoyed a macroeconomic benefit in excess of several times the financial loss reported.
Bad Banks always Lose Money in the Early Years
The business model of Bad Banks as stabilizing institutions is designed for them to be macroeconomic shock absorbers by purchasing toxic assets at a sharp discount to its face value. They then hold the portfolio till when the market conditions improve during which they sell for profit. As at April 2012, three and a half years after it was signed into law, a cost estimate for the U.S Troubled Asset Relief Program (TARP) was a loss of $60bn. Only $300bn of the about $414bn paid out to banks had been recovered. Recently published data on global Bad Banks reveals that TARP, as at September 4th, 2014, had made a profit of $41.4bn, mainly from the sale of its holdings in AIG, Citigroup and through interest payment on loans.
Similar success has been recorded by other bad banks around the globe; although the time span between commissioning and breaking even appears to vary across countries. Meanwhile, it is expected that the sectors in which these bad banks intervene will continue to grow and contribute to the general macroeconomic growth.
This appears to be the case in Nigeria as AMCON has helped create an improved operating environment for Nigerian businesses. This has ensured a less destabilising effect on Nigeria’s financial and non-financial sectors in contrast to the experience of many other countries in the crisis and post-crisis era. Specifically, a number of companies in different sectors have benefited from AMCON’s intervention. The main sectors include the oil and gas, general commerce, capital market, manufacturing, finance and insurance and aviation.
A big question is, “how would these sectors have fared if AMCON had not intervened?” They, as well as many others, would have been severely disrupted if the AMCON intervention was not made and the increase in the country aggregate output of N8.4trn between 2010 and 2013 would have been seriously at risk. When properly dimensioned, it can be proved that the entire loss in shareholders’ fund of AMCON is far less than the gain to the economy. Hence, AMCON loss is the economy gain. Some of the points below further highlight this.
Financial System: Saved and Growing Stronger
AMCON strengthened the Nigerian financial sector, especially the banks, thereby preventing the collapse of the country’s banks as well as the potential bank runs and the negative implications this would have had on the depositors. The good news is that the banking sector recovery has seen profitability back to above pre-crisis levels. The listed banks achieved in a combined Profit before Tax (PBT) of N550bn in 2012 and N529bn in 2013. Nigeria banks now export their services outside the country and are the leaders in the African banking sector story.
Real Sector: Supported and Energized
In addition to the banks, there are over 13,000 business entities that were rescued by AMCON; and the list includes some government-owned enterprises. All these businesses are maintained as going concerns while the costs of their closure and potential loss of future output averted. Following AMCON’s intervention, sectors such as general commerce, manufacturing, finance and insurance and aviation have generated additional activities worth N2.64trn, N0.18trn, N0.22trn and N0.003trn respectively between 2010 and 2013. The capital market equally gained 36.8% within the same period.
Job protection and creation
The benefits derived from rescuing these banks and other business entities can also be extended to the number of job positions that were protected. This point is particularly important for Nigeria which is grappling with the problem of high unemployment and underemployment. In other words, allowing these companies to wind up would have exacerbated the country’s high level of unemployment, worsened the level of poverty, deepened the level of inequality and reduced the level of opportunities. The expansion of some of the intervened companies equally presents enhanced opportunities for employment.
Enhanced corporate governance structure
AMCON has equally created awareness about the soundness of corporate governance structure of the Nigerian banks. Depositors and shareholders in Nigeria are now better aware of the risk factors inherent in the management of the country’s banks. Also, the punitive prices at which AMCON purchased the toxic assets of these banks as well as the imposed levy is expected to serve as deterrence to unguided expansion of credit in the future.
Forestalling further debt accumulation
Debtors’ names are made public and included in the CBN prohibition list as well as that of the credit bureau. The implication of this is that these debtors are known and are denied access to further credit facilities until they settle their existing outstanding. Without this step, it would have been possible for such entitles and individuals to obtain loans from different financial facilities. AMCON has also taken over the executive management of some of these companies with the aim of facilitating optimal performance, recovering its debt and handing it back.
The benefits as highlighted above suggest that the alternative of not having AMCON would have had some grievous consequences which are better imagined than experienced. At the time of the crisis, it was evident that something had to be done; especially in line with the global practice of establishing a bad bank like AMCON to address the problem of high NPLs. Countries that have employed similar scheme include; Sweden (1992), Finland (1990s), Latvia (2008), Ireland (2009), United Kingdom (2010), Spain (2012) and Portugal (2014). Equally, the Reserve Bank of Zimbabwe (RBZ) established a replica of AMCON in about a month ago and it acknowledged AMCON’s success in Africa.
In addition to the above success registered by AMCON, there is however a pressing need to ensure that its financial operation is equally viable. In other words, AMCON’s success will be more pronounced if it improves its financial performance and records some levels of profit. Therefore, the Company is advised to work more on this strategy which has the potential to crown its past efforts. One will also hope for an improvement in the general state of the country’s economy and asset prices as this will aid AMCON to achieve this task in a timely manner. However, the point stressed is that with or without accounting profit, AMCON has turned out a huge economic profit for the Nation.
Oil revenues are likely to decline while government expenditure is likely to increase. A cyclical economic downturn is not unlikely both due to global and domestic issues. AMCON should be prepared to start detoxifying the banks. There is also the real threat of rising inflation considering the increase in money supply to be witnessed as AMCON redeems N866.73bn worth of bonds in October, 2014 - (5.2% of M2)