Debtors Africa: AMCON; Chike-Obi's Alternative View

Proshare

Thursday, May 21, 2020 03:00PM / Teslim Shitta-Bey, Managing Editor, Proshare / Header Image Credit: EcoGraphics

 

Proshare Nigeria Pvt. Ltd.



In response to a recent report commissioned by Debtors Africa and written by Proshare on a new approach to debtor management in Nigeria, Mr. Mustapha Chike-Obi, erstwhile Managing Director of the Asset Management Company of Nigeria (AMCON) provided an alternative view to the AMCON story on mitigating the effects of delinquent debt on the domestic banking system.

 

In a post Report Launch interview with Proshare's, Managing Editor, Teslim Shitta-Bey, Chike-Obi explained why he was convinced that AMCON had performed creditably in the task of finding resolution to the delinquent debt overhang that threatened to snowball into a loan loss contagion in the banking sector in the last decade.

 

Chike-Obi pointed out that without the intervention of the Central Bank of Nigeria (CBN) under the then Bank Governor, Sanusi Lamido Sanusi, the banking system, as we know it today, could well have collapsed.

 


A Matter of Context

 

Reflecting on the challenges that existed when he assumed office as the pioneer Chief Executive Officer (CEO) of AMCON Chike-Obi pointed out that the banking industry was on the edge of a debtor-induced implosion as ballooning non-performing loans threated to wipe out banking sector liquidity and lending capacity as impairment charges depressed profits. But be that as it may, analysts have insisted that AMCON did not adopt the best governance practice in pricing delinquent loans acquired from the banks in 2010 when the bank asset resolution company was created.

 

Chike-Obi rigorously disagreed. According to the erstwhile Chairman of AMCON, "the AMCON act clearly set out the basis for the pricing of delinquent bank loans. Under the act the Central Bank of Nigeria (CBN) tells AMCON what prices it (AMCON) can pay for loans, formula for pricing was gazette and published in three national daily newspapers. The act recognized three types of loans. The first type of loans that were priced-in where securities calculated as moving average over 60 days plus 60%. The second type of loans were loans with collateral, which were to be purchase at the value of the collateral as represented by the banks at the time. AMCON had a year to review the claims by banks. Any bank having been found to have misrepresented the value of its collateral, would be sanctioned and AMCON could call back the difference."

 

The third type of loan pricing, according to Chike-Obi was, "all unsecured loans or loans without the collateral being perfected which was to be bought at 5% of the original loan value". Within this framework Chike-Obi argued, AMCON could not do any other pricing, the method of loan pricing was, "clear and gazette", he said.

 

Chike-Obi's primary argument was that AMCON, at the time, did not have the flexibility to price acquired assets outside the stated formula in the government gazette. He, however, admitted that there were exceptions. "Like the Xenon loans. But these were not within regular practice, as any loan outside the earlier stated buckets had to go through the CBN, AMCON had to make a case and CBN had to approve."

 

"AMCON really had no pricing authority over loans at any point in time", Chike-Obi noted.

 

A Look At the Ocean

 

As a case in point, Chike-Obi, made reference to Oceanic Bank. According to the former Investment Banker turned loan resolution Czar, "with these established formulas we purchased the loans of Oceanic bank at between 30 and 40 kobo per naira. The 60% loss was what AMCON called, 'the hole', it was that hole that AMCON was obligated to recovering, thereby bringing back the book value of the assets to zero. This was done to protect depositors from losing money", said the former loan resolution boss.

 

The purchase arrangement implied that in real effect AMCON was buying the loans at full price to protect depositors. The formula was such that AMCON paid 40kobo for every 100kobo of Oceanic Bank debt and the balance of 60kobo was passed to the banks (or their successor, or in this case the acquirer, ETI) to fill the hole. The 60kobo was supposed to be paid back by the banking systems collective sinking fund.

 

The concept was that rather than allow depositors lose their deposits with banks, AMCON made Oceanic bank whole, but took on only 40kobo of the asset burden and required that the entire banking system made up the balance of 60kobo over a 10-year horizon.

 

According to Chike-Obi, "when we set the initial framework for the policy, we said the sinking fund would be 30 basis points of the total assets of all banks operating in the financial market but when Lamido Sanusi (the then CBN Governor) and I took a second look at this we thought that 30 basis points was too small. We then decided to raise the basis points to 50 basis points, the banks agreed. However, Sanusi's greatest fear was that the amended figure was not in the statute books. So Sanusi said one of the fastest things he would want me to do is to get the laws speedily amended to adjust the basis points upwards". Chike-Obi said that the move for an upward revision of the sinking fund contribution by banks to 50 basis points of total assets was successfully pursued and the law was set in place.

 

The new basis point adjustment was expected to allow for a 30% recovery of bad loans and a 70% funding of AMCON liabilities. The caveat was that the formula assumed that bank assets would grow by 15% per year because the average bank asset growth up to this point was around 22%. But Sanusi soon afterwards, started a tighter monetary policy regime leading to bank assets slowing down to an annual growth of between 5 and 6%.

 

When AMCON, according to its former boss, realized that the growth of assets was not fast enough to repay the asset resolution organization in 10 years, it pushed the recovery period to 15 years. Contrary to popular notions of a 10 year 'sunset' clause that would have required AMCON to wind down activities and perhaps hand over to the Nigerian Deposit Insurance Corporation (NDIC), Chike-Obi insisted that, "there is no such clause of a sunset period in the AMCON act. The reference to 10 years was a reflection of AMCON's own institutional target based on the assumption of a 15% annual growth in the banking systems total assets. As at the time I left, there was no sunset clause in the act setting up the institution".

 

The immediate past AMCON boss also observed that AMCON's delinquent loan recovery target was shifted to 15 years when it was realized that the only way to meet the target was either to raise the basis points of banks contribution to the sinking fund or to extend the expected asset recovery period. The preferred choice was, therefore, to extend the recovery period.

 

The need to extend the loan recovery period was understandable as accretion to the sinking fund slowed down and almost 60% of delinquent loans outstanding where between less than N100m and N1bn, meaning a large portion of outstanding delinquent indebtedness was spread amongst smaller borrowers (see chart 1 below). 

 

Chart 1 Loan Distribution By % of AMCON Portfolio

Proshare Nigeria Pvt. Ltd.

Source: AMCON

 

A Twist To the Playbook

 

According the Chike-Obi the only thing mentioned in the AMCON act is the purchase price of loans. In other words, all AMCON has to recover is what it paid for the loans. The banks sinking funds was expected to pay for the bulk of the liabilities of the banks. The banks loan purchase amount was about N1.7trn, the balance of N4trn was what AMCON called, 'financial accommodation'. The accommodation was supposed to be paid back by the sinking fund, and represents what the banks at the time had lost. Based on this playbook, Chike-Obi was of the opinion that it was incorrect to say that AMCON bought loans of N6trn.


The sum of N6trn represents the face value of the loans outstanding at the time of intervention but did not represent the amount that AMCON paid. The N6trn was made up of N1.7trn that AMCON paid for eligible loans (EBLs) and N4.7trn represented the money that AMCON gave to the banks as financial accommodation to ensure that depositors were protected from loss. The financial accommodation was not AMCON's responsibility to recover but that of the banking system through the sinking fund.

 

According to Chike-Obi, "Sanusi and I had a discussion on mentioning the face value of the loans, and Sanusi prevailed that we should make the face value of the loans public in line with a policy transparency and adherence to proper corporate governance standards. Sanusi felt this would give the loan resolution body greater flexibility in pursuit of recovery"

 

"If a borrower was in a hole for N1bn, AMCON only needed to go for a recovery of between N300m and N400m, but Sanusi felt that the agency should go for the full face-value of the loan thereby putting a lesser burden on the systems sinking fund".

 

Chike-Obi also noted that the highest recovery rate globally, occurred in Malaysia which was about 58%. AMCON's target was 70% asset loss recovery. So, of the N1.7trn the agency paid for bank loans, its actual target was 70% of that or what came to roughly N1.2trn. AMCON presently has recovered about N1.1trn according to the current Chief Executive of AMCON, Ahmed Kuru. The N1.1trn recovery represents 92% of the debt resolution company's target of 70% recovery of its N1.7trn paid to banks. Based on these numbers, Chike-Obi may be correct in stating that the agency has done a good job of meeting its initial debt resolution mandate. Chike-Obi's position may be at variance with the frustration of the agency's asset management partners (AMPs) who have expressed concern over the style and strategy of the agency in recovering delinquent debt, but premised on targets set by the CBN for the body, AMCON appears to have delivered on the original agency target.

 

An interestingly compelling point that Chike-Obi equally makes concerning the recently mentioned N6trn face value of AMCON debts is that no bank would sell for 40kobo on every 100kobo face value an asset it strongly believed was worth at least 60kobo on the naira. Besides, Chike-Obi also noted that a number of the banks had already made certain provisions for the diminution in loan asset values on their profit and loss (P&L) accounts.

 

So how does CBN come in on the issue of bad bank loans? Chike-Obi argues that CBN has nothing to do with bad bank loans. In his words, "CBN bought AMCON bonds worth N5trn, the question is whether CBN can recover the N5trn invested in AMCON bonds? From AMCON's model the CBN is getting N400bn a year from the sinking fund. The CBN should get its money back if not in 10 years then in 15 years. So, what the CBN has on its books is AMCON bonds". The bond is being serviced by the sinking fund and AMCON. CBN has nothing on its books on AMCON other than the bond investment.

 

A tricky area of AMCON's playbook is a situation where the agency recovers more than was required by the recovery formula, suppose of a N1bn debt AMCON was required to recover N300m (30kobo on a naira). Suppose AMCON recovers N500m, does the additional N200m go to the sinking fund? No, it does not.

 

Chike-Obi agreed that one of the most profitable aspect of the AMCON delinquent debt was the loans without collateral that were purchased at 5%. Many of these debts, according to Chike-Obi, "were recovered 100%". The excess of money recovered over and above that required by the AMCON recovery target goes into a pool of recovered loans. The former AMCON boss reiterated that all AMCON can ever do with recovered money is to pay down its debt.

 

Available data for AMCON shows that in 2017 the agency saw gross earnings rise by +22.6% from N278.78bn in 2016 to N341.83bn in 2017. The debt resolution body saw operating income rise by +236.6% from a loss of -N15.9bn in 2016 to a profit of N21.76bn in 2017 (see Table 1 below).

 

Table 1 AMCON's Key Financial Figures 2016 and 2017

Key Financial Indicators

N'bn 2016

N'bn 2017

% Change

Gross Earnings

278.78

341.83

22.6

Total Operating Income/Loss

3.93

65.51

1,568.1

NRFF

-233.49

-233.74

-0.1

Net Operating Income/Loss

-15.96

21.76

236.3

Total Assets

1,131.01

822.41

-27.3

Total Liabilities

5,075.79

4,778.84

-5.9

Total Equity

-3,944.78

-3,956.43

-0.3

Source: AMCON

 

AMCON's Non-existent Fiscal Cushion Chair

 

Contrary to arguments in certain circles that recoveries by AMCON could be used as a fiscal cushion to help plug budgetary gaps of the federal government, Chike-Obi insists that this could never be a card on AMCON's table. "It would be strange for anyone to suggest that AMCON recoveries could be used as some ombudsman financial intervention fund to close federal fiscal gaps. It simply cannot happen, AMCON's recovery mandate and the application of recovered funds are codified in law and are unambiguous. By law as soon as AMCON pays off its debt the sinking fund disappears and AMCON disappears" said the erstwhile AMCON CEO.   

 

As far as the corporate finance professional was concerned, AMCON at no time, had the legal right or fiscal responsibility to give the federal government money for whatever purpose. Immediately AMCON's debt is at zero, the sinking fund expires and AMCON becomes a subject of financial story books.

 

 

While this can be noted, AMCON has allegedly, over a period, handed over to the federal government close to a trillion naira. Before AMCON CBN had given loans to the banks totaling N620bn, the first thing AMCON did was to pay this loan back as it was considered a part of negative equity. When AMCON came in 2009/2010 the banks had made no profits, and indeed many were booking losses. But with AMCON the books changed as many dud loans were moved off the books of banks and impairment provisions dropped significantly allowing banks to start recording turnaround profits. The taxes that the banks had started paying to government as a result of the AMCON intervention could be seen as part of the money that AMCON had engineered to the benefit of the federal purse.

 

A Little Big Thing Called Deposit Insurance

 

Chike-Obi, nevertheless, expressed displeasure at the role of the National Deposit Insurance Corporation (NDIC) in terms of charging insurance premiums on the deposits of distressed institutions. "NDIC which was supposed to pay for the deposits of banks that had failed, surprisingly they did not, preferring to march on the corpses of the dead". He noted that, "for three banks we had to take over Spring Bank, Afribank and BankPHB, we should have taken NDIC money first before putting AMCON money in, there was no reason for NDIC to be collecting insurance premiums during bank failures when AMCON was there to pay for those failures".

 

The options as far as Chike-Obi was concerned was for NDIC to pay AMCON whenever a bank collapses or it stop collecting premiums while AMCON foots the bank failure bill. NDIC was collecting premiums from banks which were beneficiaries of AMCON intervention and so AMCON was paying money to the federal government through NDIC. If the adjustments for NDIC payments to the federal government by way of premium payments on deposits are added to the taxation paid to the government by now profitable banks, the money made available to the federal government by AMCON, "would be in the region of N2trn", Chike-Obi argued. The economist was of the view that there were two reasons for cycle of booms and busts in the banking system. "the first was a problem of poor risk management. The second was the problem of overregulation by the CBN. The CBN had no business telling banks to do a 60% loan to deposit ratio. If you tell banks to expand lending the result would be that banks would accumulate bad debts, especially in an environment of weak risk management", said Chike-Obi.   

 

In the area strategy, Chike-Obi maintained that AMCON must be appreciated in that it did not only buy bad debts but it also recapitalized the banks and made sure that depositors did not lose their money. The protection of depositor's money was unique even where compared with the Malaysian model on which the Nigerian debt resolution model was based. In Malaysia there was the 'bad bank' and the 'recapitalization bank' with each handling different aspects of the debt resolution and recapitalization process. The AMCON solution, according to Chike-Obi, "has worked and saved the Nigerian banking system from collapse brilliantly and elegantly".

 

COVID-19 and Bad Debts; The Unclosed Loop

 

So, going forward does AMCON hold out any hope of a final resolution of delinquent bank loans such that there would be no, 'loan bust the next time'? AMCON's former boss argued that, "loan busts have nothing to do with whether there is an AMCON or not. The reasons why banks will keep failing has nothing to do with the debt resolution body. We are going to have a loan bust every 10 years if we keep running the economy the way we run it. We need macroeconomic changes"

 

The former banker noted that, "we need to create productive assets for banks and the best way to do it is for the government to enter into a guarantee programme where the guarantee supports certain types of loans like housing loans and infrastructure loans. Presently, there is a shortage of quality assets. Larger banks acquire assets from the big and more stable companies while the smaller banks have little choice that to on-board riskier loans from smaller enterprises with higher risk thresholds".

 

Dangote, BUA and Lafarge for example, are not likely to take loans from smaller banks. The smaller banks simply do not have the capacity to offer the right size of credits needed by these corporate behemoths. There apparently needs to be a serious restructuring of the banking system that may require a slew of new mergers and acquisitions. But this outcome would be more of an issue for the CBN to contemplate than AMCON.

 

As COVID-19 jitters create increased lending uncertainty, the CBN may need to fast track industry consolidation to de-risk the sector from a contagion of loans that may go bad as a result of supply chain disruptions, demand tail offs and severe macroeconomic headwinds in 2020. 

 

If the next loan bust is to be pushed to later than sooner, then the troubles of the banking system are far beyond AMCON and more a matter of monetary strategy and tactics, waiting for things to go awry before affirming strategic intent and execution may result in a financial blizzard from which the probability of survival is as certain as a snail dropped on an anthill of salt. 



Proshare Nigeria Pvt. Ltd.


Related Reports (PDF)

1.      Download the Full PDF Report - Debtors Africa, May 13, 2020

2.     Executive Summary PDF - Proshare, May 14, 2020

3.     AMCON and Financial Services Debt Burden in Nigeria - Aug 17, 2018


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