12 February 2011

Nigeria: Bad Loans Still Make Banks Uncomfortable


While the Central Bank of Nigeria (CBN) bailed out nine banks with N620 billion in August 2009 and fired the chief executives of eight banks, and the Asset Management Corporation of Nigeria (AMCON) bought non-performing loans from 21 of Nigeria's 24 banks on December 31, 2010 as part of measures to boost the industry after a 2008 debt crisis threatened it with collapse, Group Business Editor, ROTIMI DUROJAIYE, reports that banks are still reluctant to lend to customers.

A newspaper report last week had it that the Central Bank of Nigeria (CBN) appointed management in the rescued banks are scared of creating bad loans and declaring losses just like their deposed predecessors.

The newspaper quoted inside sources within the rescued banks as saying that the management of the banks wants to leave a clean slate when the banks are finally sold.

The managements are also reported to be afraid of being forced to announce losses or start making provision for non-performing loans on their books soon after bad loans have been taken over.

Speaking on the development, Managing Director (MD) of Maxifund Investments, Okechukwu Unegbu, said, "They are justified to be afraid. I will not lend money in the current tough economic environment in Nigeria. The chance of the loan going bad is high going by the level of infrastructural decay and cost of doing business. They will have to consider the cost of funds before they start lending and if it does not make sense, you cannot force them to lend."

Managing Director/Chief Executive Officer (CEO) of Union Bank Plc, Olufunke Osibodu, justified why banks are reluctant to lend.

"Let's start from a general perspective. The banks are not lending generally because first of all, banks need to be sure of the kind of risk they are taking. Over time, we have seen that banks have to make a lot of provisions, a lot of write-ups because of the quality of loans they have written before. Because of that, banks have to be very careful in the kinds of loans they will be booking going forward and - they now say, let's restrain ourselves, let's re-examine the kinds of loans we are booking but by and large, banks are still lending money. I do know that banks are still lending money but maybe they are careful or prudent in this manner and very organised. Union Bank is lending, we never stopped lending but once beaten...we are still the leaders in agric, in fact we have been increasing our agric loan, we are lending more: what we approved this year (2010) in small scale agric was N10 billion and that is increasing. Remember I said we are concentrating on two sectors-retail and the chain of the corporate. When it comes to corporate lending, we are careful about the sectors, the sectors that are over our limit and we are overstretched...part of the reasons why we landed where we found ourselves in Union Bank is that loans to oil-trading business were very large and so when things changed course, we just had a huge amount of bad loans in our books. So, to that sector, we are very selective in lending...it's because you want to reduce your risk factor and spread out more in those areas...so we are lending and all banks are lending but they are much more careful."

The rescued banks' management ran into their current dilemma, following the takeover of all non-performing assets from their books by the Asset Management Company of Nigeria (AMCON). The takeover has left the banks with liabilities without assets to finance it.

Lopsided balance sheets

Newspaper analysis shows that most of the rescued banks' balance sheets are now lopsided, that is - heavy on liabilities (which generates costs) but very low on assets (which generates profits).

The implication of this scenario is that the banks are incurring costs servicing their deposit base, but without loans to bring in income to cover their cost of operations.

Analysis of third quarter results of rescued banks revealed this anomaly in their balance sheets.

For example, Intercontinental Bank had a deposit book of N638 billion and a loan portfolio of N153 billion. While the bank earned interest income of N50 billion, it incurred an interest expense of N40 billion. By the time the bank added operating expense of N61 billion, it was already in the red.

However, it wrote back loans that had previously been written off as a loss of N38 billion back into its books which helped it to make a modest profit of N9 billion in the third quarter of 2010.

Afribank is another good example with a deposit portfolio of N339 billion and a loan portfolio of N105 billion. The bank earned interest income of N36 billion but made interest payments of almost the same amount. An operating expense of N20 billion pushed the bank into deep losses except that the bank wrote back into its books about N20 billion previously provided for which helped it announced a modest profit of N7.9 billion in the third quarter.

Further analysis of third quarter results also showed that all the banks had to write back previously provided loans to make profits in the third quarter. Afribank wrote back N20 billion, Oceanic Bank wrote back N15 billion, Finbank wrote back N20 billion, Intercontinental wrote back N38 billion, while Spring Bank wrote back N7.28 billion.

With the bad loans now in the hands of AMCON, the banks are no longer in a position to boost their profits with loan write backs. The implication is that the new management will have to start lending or run into losses.

A branch manager, who spoke on condition anonymity, simply said: "They have no choice. The fixed cost of running this branch alone is N6 million. That is only for salaries and overheads. Our deposits also have to be financed. The asset side of the balance sheet is empty. That also means no income is coming in. So, without doing anything, we are going to declare a loss at the end of the month. We turned away a N100 million fixed deposit last week because we were afraid of the interest on it being booked against us at the end of month."

Investigations however show that the rescued bank managements are afraid to lend because they do not want to take a chance and end up creating bad loans when they hand over the banks to new investors.

As an insider puts it - "They do not trust the staff. They are not sure how much room to give them so that they do not mess them up. Right now, instead of taking a risk, they will want to handover the banks as soon as possible, get paid off so that they can go an enjoy their pay off in peace."

But another analyst who would rather not be mentioned said that the rescued banks have every right to be cautious.

"They just emerged from a very critical situation. They now have an opportunity to rebuild their assets and they cannot build it in a hurry. They have to do it right. You should look at the up side of the whole issue. The fact is the banks now have a wide room to start lending again."

Going by this analysis, there are strong indicators that all the rescued banks will declare losses in the first quarter of 2011 if they remain stand alone entities, as they do not currently have enough assets on their balance sheets to finance all their liabilities and running costs. Their case has been made even worse by the rising cost of funds following the increase in the monetary policy rate (MPR) by the CBN. The apex bank had recently raised the MPR by 25 basis points from 6.25 per cent to 6.50 per cent with immediate effect.

Injection of N1.063b into 21 banks

AMCON had on December 31, 2010, took over the N2.5 billion non-performing loans (NPLs) portfolios of 21 of the nation's 24 banks, injecting in the process a total of N1.036 billion into their books.

There was however no injection of physical cash, the banks, one after another, received consideration bonds representing a fair value of their troubled assets, acquired by AMCON, based on a pre-stated valuation method, as priced by the corporation, in consideration. The value of the certificates will however be used in computing their liquidity position and the value of their assets, as of December 31, 2009.

Based on the three-year Zero Coupon Initial Consideration Bonds due on December 31, 2013, which has a 10.125 per cent yield, the 21 banks are expected to report healthier balance sheet than they would have, but for the bonds.

To ensure its acceptability, the bonds enjoy sovereign guaranty, and is backed by the full faith and guaranty of the Federal Government, and will be swapped for registered tradable bonds under the corporation's issuance programme, becoming tradable from January 31, 2011.

However, AMCON has postponed the much-awaited issuance of N1.5 trillion ($9.8 billion) bonds.

It said the bonds will be issued before the end of the first quarter.

AMCON Executive Director of Finance, Foluke Dosumu, who confirmed this, declared that the delay became inevitable "because AMCON had not obtained all regulatory approvals in time."

She said "The reason is that we are still doing the registration with the various regulatory bodies."

Dosumu told Bloomberg in a telephone interview that the bonds will be issued before the end of the first quarter.

Part of the debt will replace N1.04 billion of so-called consideration bonds that were sold on December 31, she said.

While it is compulsory for the nine banks rescued by the CBN - Afribank, Bank PHB, Equitorial Trust Bank, Finbank, Intercontinental, Oceanic Bank, Spring Bank, Union Bank and Wema - to be under obligation to submit their NPLs; the others are under no obligation, but may present their margin-related loans for acquisition by AMCON.

Also, the N627 billion given to the nine banks to ensure that they continue meeting their maturing obligations is to be converted to equity and held by AMCON.

The CBN has accordingly made available its window for repurchase of the bonds in the future, just as AMCON will subject the information provided, for which the bank chiefs are individually and collectively responsible, are to be subject to further assessment and adjustments.

Director-General of the Debt Management Office (DMO), Abraham Nwankwo, who represented Finance Minister, Olusegun Aganga, and presented the guaranty of the Federal Government, in support of the bonds, expressed the minister's delight at the landmark transaction.

The move - a monumental stride, he assured, will help transform the nation's economy and reinvigorate the financial system, as part of the administration's ongoing programme to transform Nigeria into Africa's financial hub.

"The event of today has very serious implication for the country. We are at the threshold of making history," he said, challenging all stakeholders to contribute their own quota to the success of the programme.

In his remark at the meeting, Chairman of AMCON, Aliyu Kola Belgore, expressed delight at the landmark event, as Nigeria is "succeeding where many have failed, or not even dared to try."

The AMCON intervention, he continued, would help shore up confidence in the nation's banking system, re-invigorate the Nigerian capital market and improve the soundness of the financial system and Nigeria's sovereign credit rating.

Describing the move as a really giant stride in resolving the challenges posed by the recklessness in the nation's financial system in the past three years, Director-General of the Securities & Exchange Commission (SEC), Arunma Oteh, praised AMCON management for going beyond their call of duty to ensure the success of the debt purchase agreement signing.

She expressed confidence that through the bonds and other instruments, the nation's capital market will truly become an enabler of economic growth and development, relying less on oil revenue.

AMCON opens talks with debtors

Meanwhile, AMCON has commenced discussions with debtors of the rescued banks as it enters the restructuring phase of its rescue programme in the banking sector.

AMCON Managing Director, Chike-Obi, who disclosed this, added that AMCON would begin the process of acquiring the remaining non-performing loans of the Deposit Money Banks next week.

According to Chike-Obi, the debtors of banks, whose NPLs have been acquired, have become AMCON's debtors, and "so, at this stage, we have begun to talk with some of them, and we will continue to talk to more with a view to assessing their problems and working out modalities for repayment."

He said, "I have two hard deadlines: I have to buy all the non-performing loans of all the banks by the end of the first quarter of 2011. We also have to recapitalise all the rescued banks by the end of the second quarter."

On bank debtors, he had said, "After the acquisition stage, we then need to sit down with the debtors, in what I call the restructuring mood. We will sit down with each one of them, understand their situation and try and get to a point that is helpful to them, but also responsible to the taxpayers. Inevitably, there will be some assets that we will acquire, and we will have to manage these assets in such a manner that will minimise the cost of resolution."

The AMCON boss also said that the corporation would begin to visit the banks before the end of next week with regard to their remaining non-performing loans, adding that the banks would be expected to submit their proposals after the visit.

He said the corporation was on track to resolve all issues relating to non-performing loans, saying, although there was so much to be done, AMCON had the capacity to meet its soft and hard deadlines.

The corporation had said that it had not floated the N1.5 trillion bonds as earlier scheduled because it was seeking some waivers from the Ministry of Finance and the Debt Management Office.

CBN under pressure over risk assets provision

Banks have started lobbying the CBN to prevail on the Nigerian Accounting Standard Board (NASB) not to enforce the requirement that banks should make general loan loss provisions of at least one per cent of risks assets.

NASB had, in 2009, at the request of the CBN, suspended compliance with the provision with the understanding that the proceeds would be used to improve lending to the economy.

NASB, a regulatory agency under the Federal Ministry of Commerce and Industry, designs and enforces accounting standards which all sectors of the economy comply with in the preparation of their financial statements.

Banks - especially their managing directors - are now against the withdrawal of the waiver of the provision in order to enable them maintain jumbo profits from which they draw about 10 per cent as bonuses.

Investigations revealed that the banks stepped up the lobby at the beginning of this year following the insistence of NASB to lift the suspension and enforce the provision. The Board has also gone further to announce same to the public.

In the announcement, NASB ordered banks to comply with the provision and to reflect it in their accounts for 2010 or risk administrative, civil or criminal sanctions.

The accounting board stated that the waiver of the provisions of paragraph 55 of statement of accounting standard (SAS) No 10: Accounting by Banks and Non-bank financial institutions (Part 1) was for financial statements ending on or before December 31, 2009 only.

"Accordingly, banks are to comply with the provisions of this statement in the preparation of their financial statements beginning from January 1, 2010," the NASB announcement read.

Meanwhile, banking sources said that bank executives are not ready to comply with the order and are opting to pay the penalty for defaulting.

"The bank managing directors are enjoying the waiver and would not want it to be discontinued. They are also ready to pay NASB sanctions which is as high as N100 million as the amount is just a fraction of their bonuses," said a management staff with a new generation bank.

He also noted that managing directors of the banks may have succeeded in winning the CBN over to their side as they argued that removing the waiver will affect their liquidity status.

NASB, according to banking sources, is bent on enforcing the provision, having discovered that the banks had defaulted on the agreement and were not using the proceeds to deepen credits to the economy which was the main reason for the waiver.

For instance, banking credits to the economy was N7.799 billion in 2008, while the domestic credit as at November 2009 was 56.10 per cent lower than the projected 86.97 per cent for 2009.

The banks, it was further gathered, were using the proceeds of the waiver to boost their profit accounts rather than their shareholders' funds and improving lending to the economy. They put it in their profit account because they earn a bonus from it annually.

If NASB succeeds in enforcing the provision, their profits as well as bonuses for 2010 would have been drastically reduced.

Executive Secretary of NASB, Jim Obazee, who declined to comment on the issue, however confirmed that the board would meet with the CBN on the issue.

"The CBN is trying to meet with us on the issue and so, I would not want to talk about it now. We are co-regulating the sector and will wait to meet the apex bank before we make announcements to the press," he said.

Reacting to this development, auditors who spoke on grounds of anonymity expressed doubt over the success of the alleged lobby.

For instance, an auditor from one of the 'big four' audit firms in Nigeria recalled that "The Nigerian Accounting Standards Board published a full-page directive in several newspapers last week. I spoke with the NASB CEO who made it clear that NASB will enforce compliance."

Also commenting on the matter, Eben Akinyemi of Stransact Partners noted that with the International Financial Reporting Standard (IFRS) transition date already at hand, the allegation is not necessary because with the IFRS, the current accounting principles will soon be jettisoned.

"This question will be overtaken by the implementation of IFRS. Under IFRS, such rule-based accounting pronouncements will be jettisoned in favour of a principle-based system that calls on the drafters of financial statements to use their judgment to make full and reliable disclosures with respect to their loan losses," he stated.

He added "Where you have made full disclosures in respect of all known losses, there will be no need for the prudential guidelines adopted. No need to lobby. They should go for early adoption of IFRS."

Until the establishment of AMCON to manage the toxic assets of the sector, 10 out of the 24 banks in the system had NPLs to the tune of N3 trillion which was suffocating to the sector.

Paragraph 55 of SAS 10 stipulates that "Banks should make general loan loss provisions of at least one per cent of risks assets not specifically provided for, in addition to specific provisions to provide against the as yet unidentified losses which are known to exist in any portfolio, using a systematic method which should be consistently followed from period to period."

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