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

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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