2010 - AMC to the rescue?
Thank goodness 2009 is over!!. For those of us in the Nigerian financial markets, 2009 is a year which we hope will never repeat itself in a very, very long time to come. During the year the All Share Index of the Nigerian Stock Exchange (NSE) dipped 34% after an equally disheartening 46% loss in 2008. Primary securities issuance was abysmally low with many planned equity offerings being shelved and the very few deals that were launched recording abysmal subscription levels. With the only green shoots being noticed in the primary markets being the fairly successful state government bond issues.
More significant than the stock market declines was our stark (Lamido Sanusi driven) realisation that our "emperors had no clothes". We found out in the aftermath of the - aptly named - "banking tsunami" that some of our biggest banks had been little more than horribly mismanaged bags of risks waiting to explode!. Seven (7) banks have been recapitalized on the taxpayer's dime and new management installed by the regulators, while the entire sector has been given a wake up jolt. For the first time many Nigerians read of multi-billion naira bank losses with at least five (5) banks recording negative equity positions (i.e. technically insolvent) with shareholder value being almost completely eroded.
As if these were not bad enough, we are entering 2010 with a new found appellation as a "country of concern" in terms of terrorism and a president whose health status remains an item of - often timid and insincere - speculation and debate. So out of this pandora-like box of troubles and concerns is there any hope for the Nigerian capital and financial markets? What is that rare glimmer of hope or green shoot of grass that we can all look forward to?. For many people in the financial markets, that will be the Asset Management Company (AMC) being proposed by the Central Bank of NIgeria.
While I recognise that the AMC is not a silver bullet and that the woes of the Nigerian markets and economy will not magically disappear with its advent. I still believe that the AMC - as conceived by the Central Bank - will still go a long way in restoring some modicum of health to the country's financial sector.
Firstly, the Central Bank's decision to have the AMC purchase loans - at least those collateralised by marketable securities - at a premium to their marked down values will help bank's restore some health to their balance sheets. Buying the marked down loans from banks at a premium to their book value will result in a capital gain and increase in the banks' core equity. This is in effect a recapitalisation through the "back door". Given the poor state of the Nigerian Equity Markets, the banks should be more than willing to take advantage of any recapitalization opportunity they can get.
Secondly, the AMC will free up significant liquidity for banks as it will swap banks' distressed loan books with highly liquid federal government debt instruments. Thereby immediately boosting the banks’ liquidity ratios from their current near nightmarish levels. This will enable banks jettison a lot of their non-accretive loan assets that are not generating significant income for the banks. Furthermore, the liquidity boost will reduce the need for banks to chase expensive deposits which have put upward pressures on lending rates and downward pressures on bank margins and profitability. Hopefully, some of these dollops of liquidity will result in the creation of new loans and help ease the current credit contraction in the Nigerian economy.
In addition to the above, the AMC may come in handy in the area of "duration extension". A major characteristic of loans in Nigeria is the very limited tenure extended to borrowers with principal repayments typically scheduled within 3-6 months of signing loan agreements. I would bet that a good chunk of the non-performing loans - particularly those advanced to companies with strong business prospects - can still be redeemed if the companies are given some leeway to trade out of their current situations. The AMC will have access to long tenured financing in the form of government guaranteed 5 and 10-year bonds and this will give them the opportunity to offer longer tenored debt as opposed to the typical banks that rely on 90 and 180 day fixed deposits for financing their loan books.
All in all, I think the AMC will be a new lease of life for the Nigerian banking and financial sector and the sooner our national legislators pass the bill to establish it the better the economy will be.
