AMCON 2.0 will cost Nigeria N1.7 trillion

Nigeria would require between N1.7 trillion and N2.2 trillion if it decides to set up another Asset Management Company (AMCON) the bad bank that pulled lenders out of a rut in 2010, according to banking sector sources.

Last week, a joint committee was set up by regulators, the Nigeria Deposit Insurance Corporation (NDIC) and the Central Bank of Nigeria (CBN) to explore the possibility of establishing AMCON 2, to buy bank loans that have gone sour and free up banks’ balance sheets.

The ratio of banks’non-performing loans (NPLs) to total credit rose to 11.7 percent at the end of June, from 5.3 percent at the end of 2015, according to the CBN, which requires that banks keep the measure below 5 percent. Independent estimates show they could be worse, prompting the discuss of whether an AMCON 2 is needed.

Setting up another AMCON to acquire Nigerian banks’ NPLs will, if successful, ease mounting asset-quality risks, according to global ratings agency, Fitch.

Ayo Akinwunmi, head of research at FSDH Merchant bank, however says the renewed rally in oil prices smothers the need for another AMCON.

“This is because rising oil prices will bring relief to the dwindling profit margins of players in the oil and gas sector. This means they have more money to service their loans,” Akinwunmi said by phone.

Crude oil prices have been rising in the last few weeks, following an agreement by the Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC member, Russia, to cut oil production by 1.5 million barrels per day.

Brent crude sold for $55.55 per barrel on Tuesday, the highest in 16 months, according to Bloomberg data.

“Resolving the militancy in the Niger-delta will also rub off on bank NPLs, so I think the Federal Government must not relent in brokering peace in that region,” Akinwunmi added.

Ahmed Kuru, managing director of AMCON, was not immediately available to comment on the feasibility of duplicating the company wherein he is managing director.

The banks are reeling from loans extended to players in the oil and gas sector when oil traded as high as $100 per barrel and their profit margins were robust. At the moment however, lower oil prices and militant attacks on oil pipelines have translated to an inability to service debt obligations.

The level of bank NPLs is the highest since the 2008 banking crisis when bad debts spiralled to about 40 percent, as lenders reeled when loans to the oil and gas sector and stock speculators turned bad.

The first AMCON was established in 2010 to buy these bad debts from banks and save the industry from collapse. The agency spent N5.6 trillion (about $35 billion- at a then exchange rate of N160/$) in 2011 to acquire non-performing loans and incurred losses of N2.4 trillion (about $15 billion).

The oil price drop and currency devaluation in 2008 stressed particularly those banks with heavy concentration in Nigeria’s dominant energy sector, while the stock exchange downturn affected banks exposed to margin lending.

By 2009, the banking sector was in crisis. Widespread insider abuse and inappropriate related-party lending were identified. The bursting of the lending bubble caused ten banks to fail, and Nigeria’s All-Share Index to slump by 70 percent.

  Umaru Ibrahim, Managing Director/Chief Executive of NDIC disclosed last week, while receiving the Committee on Insurance and Actuarial Matters of the House of Representatives on an oversight tour of the corporation, that the CBN and the NDIC are already exploring how to tackle the challenge of NPLs in the banking industry.

Ibrahim said this includes the option of establishing another bad bank, similar to the Asset Management Corporation of Nigeria (AMCON), which would be private sector funded and driven.

“There are concerns about using taxpayers’ money to bailout institutions. So, it is in line of the global best practice that we go back to the drawing board because our initial concept of AMCON is that it was going to be a joint venture between the private and public sector investors. This is to minimise the risk of using taxpayers’ money to resolve the problem of buying and selling of bad loans,” Ibrahim said.

“So, we have established a joint committee that would look into this and we hope that in the long run, we should be able to establish a second AMCON that would be private sector driven.

“Here, interested investors, the CBN, NDIC or the Finance Minister can invest, so that going forward, buying and selling of bad loans would be under the control of that entity,” he said.

Ibrahim said this would pave way for the gradual transition or folding up of the present AMCON.

However, there are those who think another bad bank is a bad idea for the banking industry, as it creates perverse incentives for the sector.

“At what point will banks learn to manage their risks?” one source familiar with the matter asked. “The banks have not learnt anything from the last time they were bailed out and I think until there are heavy sanctions for reckless risk management, these banks will continue to need bail-outs.”

Critics say banks should be allowed to bear the cost of their reckless management in order to deter further bad behaviour in future.

LOLADE AKINMURELE