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Summary: Depending on your point of view, the Asset Management Corporation of Nigeria (AMCON) has either saved the industry and is returning it to an even keel or it is hammering already beleaguered banks with its mandatory charges. Michael Nwadike discusses the current hot potato in the Nigeria industry.

Mustafa Chike-Obi, Asset Management Corporation of Nigeria (AMCON) CEO, tells anyone who will listen that the Nigerian banking sector is better off today than in 2009/2010 when the corporation was created.

The drop in non-performing loans (NPLs) from over 35% to less than 5% and improved earnings recorded by banks, with some having annual gross revenue exceeding N100bn ($627m) mark, are some of the examples he gives. Despite these positives, commercial banks and their shareholders claim the 0.5% lev y paid annually to the corporation as a sinking fund and other regulatory-induced costs created by the Central Bank are eating deep into their profits. Last December, such contributions to AMCON which is kept with the Central Bank, stood at N500bn ($3.1bn).

"We have banks making over $627.1m profits today, even with the fees. No bank ever dreamt of it before AMCON was created. I don't even think the banks are complaining. I think it is fringe people, shareholder activists that want to eat their cake and have it. I think banks today, are better off because of AMCON," Chike-Obi said. The Banking Sector Resolution Cost Fund, otherwise called sinking fund, was created by the AMCON Act of 2010 and mandates banks to contribute 0.5% of their total assets to it on yearly basis. The initial contribution was 0.3% but last August, it was raised to 0.5%.

Fears that banks may renege on paying the levy prompted AMCON and Central Bank to begin a review of the AMCON Act to ensure that the contributions continue.

Chike-Obi says it is important to ensure that the banks that created the financial crisis fund cost of resolving the problem. "What we are doing is giving them time to pay over a long period, instead of asking that they pay immediately and create another bigger problem," he said.

But Chairman , Progressive Shareholders Association, Boniface Okezie, said t he contribution i s outrageous and eating deep into the banks' earnings. He suggests t hat contributions to regulators, where necessary, should be included in banks' annual reports to show transparency and accountability. "This is not acceptable to us, and should be discouraged as such fees should be borne by the Federal Government, not quoted companies," he said.

Phillips Oduoza, Group Managing Director, United Bank for Africa, admitted that last year was a tough one for banks due to regulatory-induced reduction in income streams and also increases in some funding costs.

He says t he Commission on Turnover (COT), which used to be at $0.03 per mille maximum, was reduced to a maximum of $0.02 per mille. The second was the $0.65 Automated Teller Machine (ATM) fee scrapped by the Central Bank and finally, the hike in cash reserve ratio on public sector funds from 12% to 50%. These, he said, were very big costs for banks.

Improving confidence

Aside the need to keep the contributions rolling in, AMCON has also been running at a loss since it was created. Last November, t he corporation announced a loss of $5.1bn for the year ended 31st December 2012.

It currently owes over $358.6bn to the Central Bank and other investors in the form of bonds, $6.27bn of which was redeemed on 30th December 2013. However, by 2015, only the Central Bank is expected to be a holder of AMCON bonds as other investors, especially banks are to be paid-off this year.

According to the Central Bank, the bonds were issued to defray the cost of long years of insider loan abuses and declaration of false profits by banks, which worsened the sector's average NPLs.

Olakunle Ezun , Currencies Analyst at Ecobank Nigeria, said the MPR needed to rise to counter higher spending that would stoke inflation ahead of 2015 election.

He insisted that the AMCON bonds-related liquidity increase could undermine the naira and add pressure on the Central Bank to raise Monetary Policy Rate (MPR) this year. The MPR has been kept at 12% since October 2011 to help stabilise the naira and keep inflation under control.

But Chike-Obi said redeeming the bonds has boosted people's confidence on the corporation. "I think it sent a very positive message to Nigerians and other people across the world that we are serious with what we are doing. It shows that any money we get will be used to retire our liabilities, not diverted. This is probably the first time a Nigerian institution has returned this amount of money, and reduces its liabilities, voluntarily and willingly," he said.

He also said the bonds will not have adverse impact on the economy. "The money has been sitting with AMCON for a while. I don't think there will be much of monetary impact."

He attributed the corporation's losses to provisions for impaired assets and discount on bonds issued to finance its operations. Classification of the loss showed that the corporation spent $3.4bn to purchase NPLs from banks while the remaining $1.74bn was used on banks' recapitalisation. But the losses were expected to be defrayed through recoveries from its assets, with additional cover provided by the sinking fund.

"AMCON inherited a loss. This is the money that was lost before it came into existence. Those losses are not because it did something and lost money. There was a loss in the system of over $18.8bn depositors' fund. What AMCON did was to take that loss, and is managing the loss. So, every year, you will see some loss, but it is not loss that AMCON created," he said.

The alternative, he said, was to allow depositors to lose $18.8bn. "We are recognising a loss that occurred before AMCON was even created. What we are trying to do is take those losses manage them through recoveries and the sinking fund so as to retire our obligations over a 10-year period," he said.

Is Nigerian CIR unsustainable?

Bank costs-to-income ratio (CIR) has gone up from 57.3% in June to 64.8% in September, highlighting the impact of the recent regulatory policies.

Ike Chioke, Managing Director, Afrinvest West Africa Plc, said in a report titled Nigerian Banking League - The Fate of Small Players that he foresees a renegotiation of the AMCON contribution in the near term, as banks continue to effectively utilise their assets to ameliorate CIR.

"This presents the need for banks to come up with more innovative way of taming costs especially through the use of technology," Chioke says. He explains that on a regional basis, a peer comparison amongst African countries revealed that Nigerian banks have a higher average CIR of 64.8% while Middle and East African Countries reported an average 42.97% CIR.

"This highlights the uphill climb the industry might encounter with the consistent liquidity tightening policies.

The dilemma, however, is how the Central Bank can continue to maintain its price stability objective and equally ease liquidity required to stimulate growth," he said.

According to Renaissance Capital, the contributions levy may worsen the liquidity condition in the sector. Its associate, Africa Equity International Sales ' vice -president A kintola Akinbamidele says the levy is placing additional pressure on more illiquid banks.

IMF position

The International Monetary Fund (IMF) last November asked the Federal Government to phase out the activities of AMCON. The advice, which was contained in the Fund's Article IV Consultation Mission of Nigeria, said the phase out should be gradual. It, however, failed to give a timeline for such action.

In its 2012 Article IV Consultation on Nigeria, the Fund advised that operations of the corporation needed to be wound down to curb "moral hazard and fiscal risks".

But Chike-Obi explained that the 2012 report only advised that the corporation, having accomplished its objectives, should start winding down over a period of seven years.

"We think it is 10 years, IMF thinks it is seven years. We agree. I think there is no need for disagreement," he said. "I do not think it is a big difference between the philosophy of IMF and our philosophy. What we object to is the IMF giving us a time frame because they don't understand the Nigerian market," he said.

Chike-Obi said the IMF does not understand its operations. "They don't understand how hard it is to dispose of $1.88bn of listed securities. They don't know how hard it is to dispose of a real estate in Nigeria. They don't understand how hard it is to dispose of two of the largest airlines in Nigeria. I don't think they should be giving us a time frame. But its philosophical direction that AMCON should get smaller and smaller is in order," he said. ua

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Publication:African Banker
Geographic Code:6NIGR
Date:Feb 17, 2014
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