AMCON and Financial Services Debt Burden in Nigeria


Friday, August 17, 2018 04:00 PM / Proshare Research

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Executive Summary

Business Cycle and Policy Response

The history of economies is best captured by business cycle. It reflects the grim reality that the seed of every burst is sown in its bubble. Every prosperity leads to an uptick in   asset prices, and with time moral hazards are piled up. 

Though, monetarist over the years have consistently harped on the notion that prosperity must be effectively managed to avoid being caught up in a hard landing   scenario.

Recently, tilting towards a more forward-looking approach, Central Banks all over the world have come to terms. In their own way, they are creating mechanisms on how best to combat the next bubble that have become especially in a period of boom.

The grim reality is that bubbles have become a grim reality.  Stunningly, both spleen of economics and finance have come to terms that such bubbles turn out to be a   necessary correction to asset prices.

Recently, the cycle of bubbles and burst has become shorter. In reality, financial stability has become more cumbersome in the long run.  No doubt, this tale brings back the memories of the 2008 banking crisis coupled with the policy response in reaction to the systemic shock. 

Therefore, this edition of Proshare Confidential takes an in-depth study on the systemic   shock that led to the formation of an Asset Management Company (AMC).  The kind of AMC, Nigerian at this point, is practicing and the grey areas patterning the eclipse of the going concern of the AMC.   

However, policy response at that  time  was  intended  to avoid  an inflammation  in  the  downturn  which  could  result  in short  term  problems becoming  a long term one.

Such response gave birth to an Asset Management Company, which was named as the Asset Management Company of Nigeria (AMCON). Certainly, like all asset management company, AMCON is also a child of consequence, one born with the intent to detoxify the system. 

AMCON was poised with the responsibility of taking away bad loans out of the system. Such action calm nerves around the standing lending facility corridor. In a follow up, the   overnight rate was tampered down a bit as the AMC untangled the existing liquidity crunch.

In addition, AMCON was given the responsibility to restructuring through re- discounting capital base of bank to nil.  Thus, AMC acted as a leg room for the economy by bolstering credit to the private sector, eventually ensuring that money not dented by the shock. 

The intermediate objective  of  averting  wider  contagion by increasing  money supply  and  providing  a   breather  for pro-cyclical  lending which allowed the GDP to grow by 7.2% a year after the creation of the AMC.     

The AMCON Act 2010 was established and empowered with the ability to tap into money market. Therefore, AMCON raised a N2.3 trillion bond, which was to be refinanced at a rate of 12%.  Such amount raised was referred to as a sinking bond,  thus putting  the  corporation  in  a position of substantial financial leverage.  The Federal Government and the Central Bank injected N10 billion and N500 billion respectively

Even though such act further encouraged supply following finance after the bond was raised. Although, it was not fully guaranteed by the Federal Government which in return also increased the total Public Debt to GDP. 

Sinking Fund Explained  

The sinking fund was tied with the margin of   growth in the asset base of the Deposit Money Banks (DMBs) modelled around a historically growth pattern of 20% over the years, however the thin growth in GDP has slimmed down the growth in the asset of banks. 

More importantly,  the  super-normal  growth level  experienced  have  largely  faded  off thus threatening the  ability  to fill the sinking  fund. One thing was certain that the model failed to take into account the diminishing marginal return to scale.

Fig 1: Bank Assets from 2010 to 2017 (N’trillion)

Proshare Nigeria Pvt. Ltd.

Source: CBN

Certainly, the marginal growth levels of banks will dip at some point and diminishing   returns will play out.  Ignoring   revenue in the model, no doubt, made the sinking fund a   quick sand scenario.

What is even more disturbing is that the model failed to consider macro imbalances and structural break-out. According to our estimates, our optimistic position based on the   purported model showed that it will take 18 years to fill the hole.   

No doubt this model highlighted the limitation of asset-based model. The prompt repayment of such loan in accordance with the given framework is obviously blurred; there is a need to redeem such loan by the Apex Bank in tranches. 

Thereby, levying it on the profit of the Deposit Money Banks in piecemeal provides headroom for the AMC balance sheet.   With the exhaustion of asset for sale and rising debt issuance, financial leverage has shot up to 80%.                

Banks Transfer 

Deposit Money Banks are institution entrusted with the hope and fate of ordinary folks.  They are regarded as the trustee of their hard-earned income and sweat, there is no greater honour than that.

Thus, the transfer of financial institutions must go beyond the highest bidder. Besides they are not durable items or luxury items like paints works. Obviously, they are not   bought for fancy, but to save guard deposits, maximize existing shareholders’ wealth, create fresh wealth and deepen financial inclusion.                                                        

 In reality, they are livid columns of any economy. Therefore, it is pertinent that the transfer of banks must go beyond the bidding prices. It must include the micro prudential, capacity and track record of the buyer.

Sometimes, price could be a smoke screen, which leaves the financial system in a more delicate position than it was. Our inability to allow a balanced approach that involves both   quantitative and qualitative indicators have created a scenario whereby dead wood still persist.

Truth be told, the cobwebs still hang in our financial system.  In addition, there is need to strengthen the Nigerian Deposit Insurance Corporation (NDIC) Act as the banking system have gone through substantial evolution since 1991. After all, empowering   the   NDIC in the first place would have reduced the occurrence of grey areas or avoid committing the phenomenon of the original sin in the first place.     

One wonders if a law that empowers the Nigerian Deposit Insurance Corporation (NDIC) allows it to give a bridge bank licence. Why can’t the Nigeria Deposit Insurance Corporation wean the bank?  By doing so we can limit the room for multiplicity and accumulated losses being witnessed. 

In climes like Turkey where the savings deposit fund played a big role in averting deposit runs and also stabilizing the economy.  Certainly, having an NDIC that can live up to such billing will be in the best interest of the economy.      

Financial Statement

The huge leverage position of the firm  has continued to put net income of the  corporation under severe pressure,  thereby  resulting  into  a  negative net interest  position .  The   limited     fee     due    to   diminishing   scale, macro imbalances and the tight monetary policy has made the gulf   between interest free and interest expense inevitable. 

The AMCON scenario clearly point out the damage of huge leverage position coupled   with   high   cost of debt   and transferred macro imbalances on net interest income.        

Although other income is a major source of income, given its wide mandate. The buffering in net trading, accretion in fair gain value and bolstering net gain, crystallized a departure from the norm of net operating loss.  

Therefore, recording N26 billion in net operating profit. However, the surge in operating expenses triggering a N56.2 billion negative Earnings before Income and Taxes (EBIT) reflective of a 33% dip in loss. However, the disposal gain of N46 billion depresses the   headline loss to N16.4 billion. 

The firms cost of equity according to the net income approach puts it at 0.26% and a negative weighted cost of capital at -0.1%.  Even though the corporation recorded positive net operating profit, the high financial dragged down WAAC. 

Although, the corporation has served as a macro stabilizer, but the opportunity cost to the firm has been raising losses. It also shows that for an AMC birthed to detoxify the   financial system, there is a very dim possibility of the corporation having positive Economic Value Added (EVA).

Therefore, the Economic Value Added so far has been negative.  Certainly, the corporation is dwindling it balance sheet and reducing its losses.  However, a more aggressive approach so as to diverge from the usual trend accumulating loss.  More importantly,  it has  to dilute  its leverage,  it’s  not  healthy  for  the  earnings, especially  when  current asset  meant for  disposal  is not.           

Conclusion: White Noise of Eclipse  

In fairness, there is no 10 years eclipse in the AMCON Act, rather such perception is drawn from the National Asset Management Agency (NAMA) of Ireland which has a 10 year lifeline. AMCON is similar to NAMA, besides they were birthed around the same time.  While we do admit the reality of business cycles, with the revolving door scenario and the existing macro imbalances, more than ever, there is a need for an AMC.  

However, a two-case scenario, the tail scenario is one whereby the value of the AMCON ends up been an arm of NDIC.  Just like Resolution Trust Corporation which later became a division of the Federal Deposit Insurance Corporation.  The head scenario revolves round the corporation becoming more independent and winding down its balance-sheet.  Moreover, rather than reward moral hazard, it must restructure its capital and be more profit oriented.  Anything less will be self-injurious in the long term.                                                         

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Proshare Nigeria Pvt. Ltd.

Previous Proshare Confidential Report (s)

1.       Poverty Tracker and Nigeria: Raising The Red Flag – Jun 2018

2.      POCKET Economics: Addressing Income Inequality – May 2018

3.      The Silent Drug Epidemic: A Gathering Storm - Apr 2018 

4.      Judging IMF’s Position on Development Indices – Mar 2018

5.      Money Market: The Folk Road – Feb 2018    

6.      The Headache of Missing Targets – Jan 2018

7.      2018 Outlook on the Nigerian Economy: The Need for an Even Keel – Dec 2017

8.     Nigeria External Economy and the White Noise of Import Dependency – Nov 2017

9.      States and the Rising Weight of Debt – Oct 2017

10.  Money Supply: Reeling from Policy Response – Sep 2017

11.   How Rail and Energy Will Deliver a Robust Economy for Nigeria – Aug 2017

12.  Too Big Government: The Hysteria of Developmental Quagmire – Jul 2017

13.  The Nigerian Debt Conundrum and the Need for Automatic Stabilizers – Jun 2017

14.  Article IV vs. ERGP - The Third Way – May 2017

15.   Lifting The Veil off The Financial Sector – Apr 2017

16.  Towards An Economic Model for Nigeria; Going Beyond Symptomatic Responses - The Panama Model – Mar 2017

17.   FX Utilisation in January 2017-Symptoms of An Opaque Structure – Feb 2017


Related Materials / References



1.       Asset Management Corporation of Nigeria Act 2010 - Proshare

2.      Asset Management Corporation of Nigeria (Amendment) Act 2015 - Proshare

3.      Guidelines for Operations of The Asset Management Company of Nigeria - Proshare

4.      CBN Exposure Draft - Licensing of Private Asset ... - Proshare Mar 27, 2018

5.      Final - Jonathan Signed AMCON Act - Proshare [PDF]

6.      The NDIC Act [PDF]

7.      NDIC | NDIC Amendment Act Mar 20, 2015

8.     BOFIA Act 1991 (As Amended in 1997, 1998, 1999 & 2002 - Proshare

9.      Banks and Other Financial Institutions (BOFI) Act - CBN ... [PDF] Mar 25, 2007

10.  BOFIA Nigerian Lawyer Website — Lawyard

11.   Investments and Securities Act (ISA) 2007 - Lawyard ... Jan 28, 2018

12.  National Assembly Seeks To Review The AMCON Act ... - Proshare Mar 27, 2018

13.  New Regulations To Prevent Financial Crises And Improve Financial Stability

14.  An Analysis Of Nigerian Law On Procedure For Recovery Of Debt ... Feb 18, 2016


16.  NDIC seeks power to strengthen regulatory capacity - Proshare

17.   CBN, NDIC, SEC defend AMC bill - Proshare

18.  The NSE's Perspective on the AMCON Amendment Bill - Proshare Feb 18, 2014

19.  Sanusi’s banking reform to wait as Senate suspends AMC bill – Apr 03, 2010 

20. Update on Establishment of Assets Management Company - CBN Mar 05, 2010



21.  AMCON 2017 Financial Result – Resolution Bank Turns ... - Proshare Jun 04, 2018

22. AMCON: Financial Loss but Economic Profit - Proshare Aug 18, 2016

23. AMCON's N5.21tr and the 2030 Wind-Down Target Date – SMART Advisors , Sept 14, 2014

24. AMCON: Why a Financial Loss has become a Huge Economic Profit Sept 14, 2014

25.  AMCON declares FY 2013 results, Total Liabilities now at N5.21trillion Sept 12, 2014

26. AMCON declares FY 2013 results, Total Liabilities now at N5.21trillion [PDF] Sept 12, 2014

27.  Bailing out the bailer: AMCON announces refinancing plans for N5.7 ... May 23, 2013

28. The N5.7tr Bad Bank Bonds and Nigeria's Domestic Debt ... - Proshare May 21, 2013

29. AMCON announces Comprehensive Refinancing Plans for N5.7trillion ... May 17, 2013

30. Why AMCON's Announcement Makes Sense - Proshare May 17, 2013

31.  AMCON Renders a N2.37trn Loss - Proshare Dec 14, 2012

32. AMCON Audited Results 311212 – 'Harm Averted is Benefit Unseen - AMCON Dec 19, 2012

33. AMCON Management Presentation Dec 19, 2012

34. AMCON begins sale of N2.5 trillion zero-coupon bonds - Proshare  Dec 02, 2010



35.  The Bull in the China Shop – A New Paradigm in the ... - Proshare Aug 21, 2009

36. The Bull in the China Shop 220809 - Proshare [PDF]

37.  CBN Renews The Mandate Of Skye Bank Board of Directors - Proshare Jul 04, 2018

38. Skye Bank Plc: One Year After CBN Takeover - Proshare Aug 07, 2017

39. Nigeria's Central Bank Takes Over Skye Bank - Sacks ... - Proshare Jul 04, 2016

40. Skye Bank Ratings Suspended Due To Lack of Sufficient ... - Proshare

41.  Nigeria's Skye Bank Downgraded To 'CCC-' On ... - Proshare

42. Reworking the Acquisition Maths of Mainstreet Bank by ... - Proshare Oct 27, 2014

43. The Surprising New Math of Acquisition of Banks in Nigeria - Proshare Oct 24, 2014

44. Mainstreet Bank to receive inflow of 121,375,422 units of AMCON series V Bonds Oct 13, 2014

45.  Skye Bank Plc and AMCON Sign Agreement on Acquisition of Mainstreet Bank Oct 09, 2014

46. Nigeria's Skye Bank Plc Wins Bid for AMCON's Sale of Mainstreet Bank Oct 06, 2014

47.  Banks: New Wave of Capital Raising as Access Bank Rights Issue ... Sept 02, 2014

48. AMCON reaches amicable settlement with Ifeanyi Ubah, hands over Capital Oil

49. AMCON Announces Sale of Shares in Enterprise, Keystone ... - Proshare May 17, 2013

50. AMCON in search for Advisers for Sale of Nationalised Banks - Proshare Mar 04, 2012

51.   AMCON to Buy N1.2tr Bad Loans in Rescued Banks. - Sanusi

52.  AMCON Commences Valuation of Debtors' Properties - Proshare Dec 12, 2011

53.  AMCON Had a Duty to Act – Mustapha Chike-Obi - - Proshare Aug 27, 2011

54.  SEC endorses establishment of Bridge Banks Aug 07, 2011

55.  AMCON announces Board Members of Nationalized Banks Aug 07, 2011

56.  Afribank & Co: AMCON acquires Bridge Banks, injects N679bn Aug 07, 2011

57.  AMCON Acquires Bridge Banks – Press Statement - Proshare Aug 06, 2011


Commentaries and Opinion

58. Borrowing Cost on External Debt to Increase - Proshare Jun 25, 2018

59.  DMO Publishes Q1 2018 Debt Data; Total Public Debt ... - Proshare Jun 20, 2018

60. External Debt Sustainability: Impact on Nigeria - Proshare Mar 28, 2018

61.  Bad Debt in Nigeria – The Case of an Able but Unwilling Debtor Jun 01, 2016

62. How Banks, Govt Policies Kill Manufacturing in Nigeria - The MultiTrex case ... Aug 21, 2015

63. Years After -Emefiele's CBN: one year after - Proshare Jun 10, 2015

64. Keynesian’s idea of a Macro stabilizer: AMCON a case study. Oct 13, 2014

65.  Nigeria Switches to Foreign Debt to Lower Costs - Proshare May 20, 2013

66. IMF Changes Position on AMCON - Proshare May 15, 2014

67.  Why AMCON's Announcement Makes Sense - Proshare  May 17, 2013

68. The IMF got it wrong on AMCON - Proshare Apr 04, 2013

69. Back to the present: AMCON: Business or Charity? - Proshare Apr 04, 2013

70. AMCON Refinancing and the Misplaced Fears - Proshare May 21, 2013

71.   AMCON Debt Refinancing is Credit-Positive for Sovereign ... - Proshare Jun 05, 2013

72.  Nigerian banking reform: Recent actions and future prospects - Proshare Jun 5, 2011

73.  Years After - CBN's Intervention in Banks: One Year After – Thisday  Oct 08, 2010

74.  On Bank Nationalisation and the AMCON/NDIC Intervention – Eghes Eyieyien Sept 22, 2010

75.  AMCON: Leading Stabilizer amongst Peer Countries. An ... - Proshare Mar 05, 2014

76.  AMCON: The journey so far - Proshare Jun 23, 2010

77.  CBN: AMCON to Clear N1.5tr Bad Loans by Dec – Emele Onu  07.02.2010

78. Impact of Asset Management Corporation of Nigeria (AMCON) On the economy - [PDF]

79.  EconPapers: Moral Hazard and the Financial Crisis Jun 22, 2008


Other News

80.Buhari Appoints Banire as AMCON Chairman Jul 18, 2018

81.  AMCON Loses Bid To Take Over Old Federal Secretariat ... - Proshare Jun 15, 2018

82. Multi-Trex Plc; AMCON Reached Closing Phase in ... - Proshare Aug 11, 2017

83. President Buhari approves Appointment of New AMCON MD and Executive Directors

84. Top 100 AMCON Debtors - June 2016 - Proshare Jun 27, 2016

85. Stockbrokers condemn publication of new debtors' lists - Proshare

86. CBN regrets any inconveniences on debtors list - Proshare Aug 19, 2009

87. Finance Minister Clears Stance on Capital Market Forbearance Package

88.Investment Manager Views Show Strong Consensus as Credit Cycle Ages

89. Banking credit to private sector rises to N9.81trn after intervention Report

90. The Use Of Prudential Backstops To Prevent The Building Up Of New NPLs

91.  We have Stabilized Skye Bank, Recovers N60billion from Debtors – Tokunbo Abiru

92. Etisalat not under Investigation, 42% of Original Loan Repaid

93. Banks' Exposure to Etisalat Nigeria: Restructuring or Equity Conversion?

94. Social Benefit Exceeds Financial Loss

95.  BRIPAN 2.0 - The Case For A New Thinking For The Insolvency Market

96. MRS Placed Under Review Following Latest Court Filing by AMCON

97.  Ecobank Nigeria Loses Winding Up Suit(s) Against Honeywell Group

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