AMCON allays fears of liquidity surge on back of N1.9tn redemption

Mustafa Chike-Obi, managing director and chief executive of the Asset Management Corporation of Nigeria (AMCON) has said that the redemption of N867 billion matured bonds last Friday will not have negative impact on the liquidity position of the economy.

Chike-Obi’s optimism may be based on the fact that the redemption of the outstanding N867bn ($5.3bn) was by swapping the bonds for a combination of cash and T-bills, with non-CBN holders (mostly banks), with greater percentage in Treasury Bills instruments.

Consequently, the chief executive said that efforts are being made to ensure that the redemption does not disrupt the liquidity situation in the economy.

“The CBN is fully aware of this payment, much of this payment was in treasury bills in order to manage liquidty. We are fully confident that the CBN will take every step to make sure this is not an event that will hurt the economy.”

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But some analysts say the deal has led to a surge in liquidity into the domestic banking sector, further heightening the risk that the Central Bank of Nigeria (CBN) would further embark of monetary policy tightening, possibly in the area of a hike in cash reserve requirement (CRR) at its next meeting due in three weeks.

At the hand-over of redemption certificates to holders in Lagos yesterday, the chief executive further said that in December 2013, the Corporation had redeemed its issued Series I, II, III and IV Bonds.

“AMCON has now fully retired a total of N1,874,379,519,000 of all Bonds issued since inception. This puts it ahead of its planned redemption schedule, as all its publicly held Bonds have been redeemed before the end of its 4th full year of operations,” Chike-Obi said.

AMCON had issued zero coupon Bonds with a face value of N5.67 trillion as Series I, II, III, IV and V, between December 2010 and December 2011, with the Series V redemption financed through utilising AMCON’s internally generated cashflows and the Banking Sector Resolution Trust Fund (“the Sinking Fund”), funded annually from contributions of Nigerian Deposit Money Banks and the Central Bank of Nigeria (CBN)

But the analysts said last night that last week’s deal may have led to a surge in liquidity into the domestic banking sector, which could lead to a possible  hike in cash reserve requirement (CRR).

“This event ordinarily boosts the effective liquidity of the banks and gives them more room to optimise returns going forward, unlike the AMCON bonds which were largely illiquid,” said Adesoji Solanke, Vice President and Banking Analyst (SSA) at Renaissance Capital, in a Nov 3 note.

“We think this event underlines the risk that the private sector cash reserve requirements (CRR) gets hiked at the next MPC meeting on 24-25 November,” Solanke said.

About 30 percent of the redeemed amount (N260bn/$1.6bn) was paid with cash and the balance with a variety of T-bills (N606bn/$3.7bn).

The CBN is sensitive about excess liquidity in the system and may be more willing to raise the CRR than allow the currency to move in a wider range against the dollar, in a bid to maintain macro – stability.

“From the last MPC meeting in September, we noticed a hawkish tone by the MPC members, indicating a further tightening, due to a possible liquidity boost from AMCON bond redemption and political spending with inflationary pressure being on the front burner,” said Kayode Omosebi, a financial services analyst with UBA Capital, in a response to questions.

The apex bank targets a range for the naira 3 percent plus or minus 155 to the dollar, at its twice-weekly currency auctions, but the currency trades freely in the interbank market, where it weakened to a low of N166.1 to the dollar yesterday, according to FMDQ data.

The CBN has imposed Cash Reserve Requirements (CRR) of 75 percent on public deposits in banks and 15 percent for private deposits.

Tight monetary actions by the regulator mean Nigerian banks’ asset growth and earnings will fall in the next 18 months, Fitch Ratings Ltd. said in an Oct. 8 report.

“All these moves led to weaker profitability and stemmed credit growth in the first half of 2014. This is likely to continue into 2015,” Fitch said.

Rencap recently lowered its Q4, 2014 net interest margins (NIM) forecasts for First Bank, Nigeria’s largest lender by assets, over the next two years by 30-40 basis points, partly on the back of a risk of higher CRR.

Investors have sold bank stocks as lenders struggle to deliver returns in line with their SSA peers – with an 18 percent return on average equity RoAE in half year 2014 compared to 26 percent and 47 percent for Kenyan and Ghanaian banks.

“We believe there is an evenly probable chance that the CBN may review the CRR on private or public deposits due to the AMCON maturities,” said Meristem research analysts.

PATRICK ATUANYA &  HOPE MOSES-ASHIKE