Will CBN set up another AMCON or liquidate any failing bank?

It is now obvious that there are crakes in the financial walls of Nigeria banking system. How deep the crakes are is yet to be known. There are growing worries that the nation may need another Asset Management Company to deal with the ever rising non performing loans in the banking system. The Asset Management Company of Nigeria AMCON has long stopped buying non performing loans. It is saddled with how to pay the N5.2trillion outstanding bond in the next nine years. It is not even in any position to buy new non performing loans except the instrument setting it up is amended.

The Chief Executive Officer, CEO, Asset Management Company, AMCON, Ahmed Kuru, said recently that the agency may lease out seized assets to raise funds for its operations. AMCON may opt for the real-estate scheme by the end of the year if it’s unable to generate funds for the repayment of its bond. The agency was created six years ago to take on non-performing loans in banks and rescue the nation’s banking industry from systemic collapse.

Stressing that companies that owe AMCON are struggling to off-set their debts due to the slump in crude prices that has crippled foreign-exchange supplies and the country’s economy, Kuru said the agency has no plan to rescue banks as it’s focused on repaying the N5.2trillion outstanding bond in the next nine years. He said AMCON incurred about 14,000 non-performing loans at the cost of N3.9 trillion in a government-led bailout of ten banks following the 2009 banking crisis. Just some six years down the road after AMCON was set up, can Nigeria afford another banking crisis especially now that the federal government is cash strapped?

The signs that the banking system may soon burst reared its ugly face when the CBN had to remove the board of Skye Bank and replace it with a new board. Besides the CBN said that there were few other banks its eyes are on which financial indices are below the approved ratio. The governor Mr Godwin Emefiele explained that CBN had to remove all the non-executive directors and two longest-serving directors of Skye Bank and appointed new non Executive and Executive Directors and EDs in their place.
“The most important issues in banks are Non Performing Loans (NPL), Capital Adequacy Ratio (CAR) and liquidity situation. What we have since late 2014 to 2016 is that the prudential and adequacy ratio has been weakening. We thought it is not right for us to allow this to continue to the point that it gets irreversible. That is why we took this step to nip it in the bud. It has nothing to do with being in distress. We do not want the liquidity and adequacy ratio to worsen to the point that depositors’ fund gets into risk,” he explained.

Skye Bank evolved from the merger of five legacy institutions including Prudent Bank Plc, EIB International Plc, Bond Bank Limited, Reliance Bank Limited and Co-operative Bank Plc. To confirm fears that there are holes in the capital of banks in the country, the Managing Director/Chief Executive of Nigeria Deposit Insurance Corporation (NDIC), Alhaji Umaru Ibrahim expressed concern over the increasing wave of non-performing insider loans in various banks and its consequence on the stability of the nation’s banking system. Alhaji Ibrahim expressed this concern while receiving the newly elected President and Chairman of Council of the Chartered Institute of Bankers of Nigeria (CIBN), Professor Segun Ajibola and some of his executive members who paid a courtesy call on the NDIC Senior Management in Abuja. According to him, the development had posed credibility questions which were capable of eroding public confidence in the banking system.

He called for strict compliance with the existing code of conduct and a review of the existing laws and regulations to provide stiffer penalties for directors who take advantage of their positions and fail to pay back their loans.

The NDIC CEO observed that the situation, in which casual staff accounted for about 25% of the banking industry workforce, had a negative impact on the industry.

Alhaji Ibrahim noted with concern the practice of some banks that assign sensitive roles to casual staff; thereby exposing the banking industry to cases of fraud and forgeries.

Recall that on October 5, 2014, AMCON announced Skye Bank Plc as the preferred bidder for Mainstreet Bank Limited with N126 billion. Mainstreet Bank, formerly Afribank, was adjudged to possess N261 billion assets in 2012 and N29.8 billion shareholders’ fund as at 2011. AMCON had selected Skye Bank for the acquisition of all its interests in Mainstreet Bank, representing the entire capital of the bridge bank after a rigorous bidding exercise that spanned five months and involving over 20 bidders.
Banks in a panic move to fill up the hole in their capital base are resorting to raising fresh capital from the public in a depressed economy. Five banks, Wema, First City Monument Bank FCMB, Sterling Bank, Diamond, Skye have openly declared their intentions to raise funds from the capital market to beef up their capital.

Diamond Bank for instance said it is considering raising fresh capital and selling some assets in order to maintain its capital ratios, its chief executive said last week. Uzoma Dozie said the bank’s capital plan will ensure it meets all regulatory requirements both in the short term and in the future. Diamond Bank’s capital adequacy ratio had fallen to 15.6 percent of assets by mid-year from 18.6 percent a year ago. “We are doing a capital management plan and that will determine how much capital we want to raise, tenor and size,” Dozie told an analysts’ conference call. We don’t have any need to grow our branch network any more. We are also looking at some assets that we can dispose of and we are a long way into that,” he said

First City Monument Bank FCMB on its part said it plans to raise 10 to N15 billion  in Tier II debt to boost its capital ratio and will target its retail investors for the offering, its chief executive officer said. Ladi Balogun said its capital ratio was close to the regulatory limit of 15 per cent by half-year, and that it was doing the capital raising to provide some cushion. He said the bank was also slowing down loan growth. “For the Tier II we would be looking at anywhere in the range of 10 to 15 billion naira. Its really going to be targeted at retail because we feel that the rates from institutions will be high,” Balogun told an analysts conference call.

Banks are under pressure as their loan books – nearly half of them in dollars are under performing as a result of shrinking economy, a plunging currency and acute foreign exchange shortages following the slump in oil prices. The central bank has told banks to set aside extra provisions against their dollar loans in the wake of the sharp fall in the naira since it floated the exchange rate in June.

The critical question the banks hoping to raise funds from the capital market must answer is who will buy these shares on offer? With months of unpaid salary and rising prices of goods and services in the country, how many Nigerians can afford to buy share? The reason why banks will find it difficult to raise money from the capital market is not just because of economic downturn but their inability to declare dividend for many years. Some of these banks have not declared dividend for years, so there is lack of confidence in their management to meet shareholders’ expectations .For, instance, Wema Bank has not paid dividend for more than four years. So, how can investors be encouraged to invest money in such a company especially in this present economic downturn? For companies paying dividend consistently such as Sterling Bank etc they may succeed in raising the funds”

However, bond issue could be favouarble to some of these banks especially when it is non convertible, stressing that companies should indicate how the debt would be serviced. Rights issue and public offering are not favourable at this period in time as the economy is in recession. There is nothing happening in the economy as activities have been low. Workers are being owed salary and contractors not being paid.”

This is not the right time to float rights issue or public offering because the economy is in recession. The disposable income of consumers has been depleted by the rising inflation. Even state governments are not paying salary to workers; contractors are being owed and no meaningful economic activities are going on. So, how can investor save and invest in the capital market.

What is the way forward to avoid a system financial crisis from the collapse of banks, another Asset Management Company? The ball is in the CBN court, it can play it the way it want by promptly liquidating distress banks or rescue any failing bank as it has done with Skye bank and in the recent past.

 

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