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

In response to a recent report commissioned byDebtors Africa and written by Proshare on a new approach to debtor managementin Nigeria, Mr. Mustapha Chike-Obi, erstwhile Managing Director of the AssetManagement Company of Nigeria (AMCON) provided an alternative view to the AMCONstory on mitigating the effects of delinquent debt on the domestic bankingsystem.

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

Chike-Obi pointed out that without theintervention 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 havecollapsed.

A Matter of Context

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

Chike-Obi rigorously disagreed. According to theerstwhile Chairman of AMCON, "the AMCON act clearly set out the basis forthe 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 pricingwas gazette and published in three national daily newspapers. The actrecognized three types of loans. The first type of loans that were priced-inwhere securities calculated as moving average over 60 days plus 60%. The secondtype of loans were loans with collateral, which were to be purchase at thevalue of the collateral as represented by the banks at the time. AMCON had ayear to review the claims by banks. Any bank having been found to havemisrepresented the value of its collateral, would be sanctioned and AMCON couldcall back the difference."

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

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

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

A Look At the Ocean

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

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

The concept was that rather than allow depositorslose their deposits with banks, AMCON made Oceanic bank whole, but took on only40kobo of the asset burden and required that the entire banking system made upthe balance of 60kobo over a 10-year horizon.

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

The new basis point adjustment was expected toallow 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% peryear because the average bank asset growth up to this point was around 22%. ButSanusi soon afterwards, started a tighter monetary policy regime leading tobank assets slowing down to an annual growth of between 5 and 6%.

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

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

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

Chart 1 LoanDistribution By % of AMCON Portfolio

Source: AMCON

A Twist To the Playbook

According the Chike-Obi the only thing mentionedin the AMCON act is the purchase price of loans. In other words, allAMCON has to recover is what it paid for the loans. The banks sinkingfunds was expected to pay for the bulk of the liabilities of the banks. Thebanks loan purchase amount was about N1.7trn, the balance of N4trn was whatAMCON called, 'financial accommodation'. The accommodation was supposed to bepaid back by the sinking fund, and represents what the banks at the time hadlost. Based on this playbook, Chike-Obi was of the opinion that it wasincorrect to say that AMCON bought loans of N6trn.

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

According to Chike-Obi, "Sanusi and I had adiscussion on mentioning the face value of the loans, and Sanusi prevailed thatwe should make the face value of the loans public in line with a policytransparency and adherence to proper corporate governance standards. Sanusifelt this would give the loan resolution body greater flexibility in pursuit ofrecovery"

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

Chike-Obi also noted that the highest recoveryrate 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, itsactual target was 70% of that or what came to roughly N1.2trn. AMCON presentlyhas recovered about N1.1trn according to the current Chief Executive of AMCON,Ahmed Kuru. The N1.1trn recovery represents 92% of the debt resolutioncompany's target of 70% recovery of its N1.7trn paid to banks. Based on thesenumbers, Chike-Obi may be correct in stating that the agency has done a goodjob of meeting its initial debt resolution mandate. Chike-Obi's position may beat variance with the frustration of the agency's asset management partners(AMPs) who have expressed concern over the style and strategy of the agency inrecovering delinquent debt, but premised on targets set by the CBN for thebody, AMCON appears to have delivered on the original agency target.

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

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

A tricky area of AMCON's playbook is a situationwhere 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 profitableaspect of the AMCON delinquent debt was the loans without collateral that werepurchased at 5%. Many of these debts, according to Chike-Obi, "wererecovered 100%". The excess of money recovered over and above that requiredby the AMCON recovery target goes into a pool of recovered loans. The formerAMCON boss reiterated that all AMCON can ever do with recovered money is to paydown its debt.

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

Table 1 AMCON'sKey Financial Figures 2016 and 2017

Source: AMCON

AMCON's Non-existent Fiscal Cushion Chair

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

As far as the corporate finance professional wasconcerned, AMCON at no time, had the legal right or fiscal responsibility togive the federal government money for whatever purpose. Immediately AMCON'sdebt is at zero, the sinking fund expires and AMCON becomes a subject offinancial story books.

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

A Little Big Thing Called Deposit Insurance

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

The options as far as Chike-Obi was concerned wasfor NDIC to pay AMCON whenever a bank collapses or it stop collecting premiumswhile AMCON foots the bank failure bill. NDIC was collecting premiums frombanks which were beneficiaries of AMCON intervention and so AMCON was payingmoney to the federal government through NDIC. If the adjustments for NDICpayments to the federal government by way of premium payments on deposits are addedto the taxation paid to the government by now profitable banks, the money madeavailable to the federal government by AMCON, "would be in the region ofN2trn", Chike-Obi argued. The economist was of the view that there were tworeasons for cycle of booms and busts in the banking system. "the first was aproblem of poor risk management. The second was the problem of overregulationby the CBN. The CBN had no business telling banks to do a 60% loan to depositratio. If you tell banks to expand lending the result would be that banks wouldaccumulate bad debts, especially in an environment of weak risk management",said Chike-Obi.   

In the area strategy, Chike-Obi maintained thatAMCON must be appreciated in that it did not only buy bad debts but it alsorecapitalized 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 Malaysianmodel on which the Nigerian debt resolution model was based. In Malaysiathere was the 'bad bank' and the 'recapitalization bank' with each handlingdifferent aspects of the debt resolution and recapitalization process. TheAMCON solution, according to Chike-Obi, "has worked and saved the Nigerianbanking system from collapse brilliantly and elegantly".

COVID-19 and Bad Debts; The UnclosedLoop

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

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

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

As COVID-19 jitters create increased lendinguncertainty, the CBN may need to fast track industry consolidation to de-riskthe sector from a contagion of loans that may go bad as a result of supplychain disruptions, demand tail offs and severe macroeconomic headwinds in2020. 

If the next loan bust is to be pushed to laterthan sooner, then the troubles of the banking system are far beyond AMCON andmore a matter of monetary strategy and tactics, waiting for things to go awrybefore affirming strategic intent and execution may result in a financialblizzard from which the probability of survival is as certain as a snaildropped on an anthill of salt. 

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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