The Central Bank of Nigeria (CBN) has set up a technical team to value bad bank loans that will be purchased by the new Asset Management Company (AMC) which comes on stream this month. The CBN and finance ministry have finalised plans for the take-off of the asset management firm which will buy up non-performing loans in exchange for government bonds in order to free up banks’ balance sheets.

In fact, analysts have posited that the impact on liquidity might spur the Central Bank of Nigeria (CBN) into embarking on excess liquidity mop up or a likely hike in Monetary Policy Rate (MPR) in its July Monetary Policy Committee (MPC) meeting.

According to Bismarck Rewane, chief executive of Financial Derivatives Company Limited, in its May report presented at the Monthly Lagos Business School Meeting, short recovery is expected in the next couple of weeks as market bounces back from current low as a result of expected liquidity inflow.

Razia Khan, regional head of research, Africa Standard Bank, said the recovery of oil prices and output, creation of the AMC, and government’s spending plans ahead of elections in 2011 will all add to money supply. She, however, said recovery will be short-lived due to expected increase in interest rates, and further pressure on exchange rate as the holiday season approaches.

“Expect to see a lull in market activity in the summer months, while intervention by regulatory agencies on the broker-dealer community may reduce activities on the stock exchange and introduce further downwards pressure”, she said.

According to Khan, so far the stock market has been showing strong correlation with interest rate environment. For instance, high interest rate volatility has contributed to the volatility in the stock market, with the stock market benefiting from depressed rate environment as investors sought higher yields. In fact, the analysts are sure the apex bank may tinker with the idea of raising rates in its July meeting due to growing money supply.

Khan is, however, optimistic that the fixed income market (a market for trading bonds and other preferred stocks) will benefit as corporate bonds will be issued at higher yields.

For instance, N80 billion FGN bond was sold in the month of May. Similarly, a N25 billion was sold at the 3-year bond end of the market at a yield of 5.5 per cent, while another N25 billion was sold at the 5-year end of the market at 4.0 percent. The N30 billion was sold at the 20-year at 8.5 per cent. Successful bids for the three, five and 10-year offers were allotted at the marginal rate of 8.25 percent, 9.00 per cent and 10.00 per cent.

On how the CBN had fared in one year of Lamido Sanusi’s stewardship as governor, Khan said the apex bank is likely to be encouraged to continue its unbundling of universal banking.

 She expects further regulation of banking entities and consolidated supervision to intensify in the coming years. However, she identified some policy challenges such as fiscal dominance and indiscipline at the sub-national government level, and temptation to bleed the Excess Crude Account (ECA) as areas to watch out for.

Others include ensuring an orderly succession at the Nigerian Stock Exchange (NSE), weeding out the insolvent and insidious broker/dealers and sanitising the capital market. The House of Representatives signed a harmonised bill on Thursday, while the Senate is expected to vote on the legislation when it resumes work on June 22. “The central bank and the finance ministry have already set up technical teams that are doing implementation,” Central Bank governor, Lamido Sanusi told CNBC Africa television.

“We are looking at the toxic assets, we are looking at the value of the collateral, we are working on valuation models.” With bad loans off banks’ books, CBN hopes financial institutions will resume lending which had ceased since last year’s $4 billion bail-out of nine weak lenders.

“We will have a return to credit growth. It will be gradual but this time it is hopefully going to be sustainable,” Sanusi said. The central bank wants new investors to recapitalise the rescued lenders but they are unlikely to do so until after the AMC purchases the bad loans.

“By the time we have done the M & A (mergers and acquisitions), taken off the toxic assets and gone through a recapitalisation process, the supply side of credit will improve,” he said.

Sanusi also raised concerns over the state of the troubled airline industry and its potential impact on the banking system. “Every airline in the country seems to have non-performing loans,” he said. “One airline, for instance, owes a bank over N100 billion. Now that is enough to wipe out the entire capital of the bank.”

CBN is already extending a N500 billion fund meant to stimulate credit to the power and manufacturing sectors to airlines.

Meanwhile, after a round of profit taking precipitated a recent downturn in stock values, Nigeria’s stock market will begin a sustained rebound with the commencement of AMC as stock prices are expected to start an ascent in value, analysts have predicted.

The coming on stream of the AMC coincides with the expected rise in government spending, occasioned by federal government’s lining up of a supplementary budget to take care of certain overheads by ministries, departments and agencies (MDAs). This will increase the spending capacity of civil servants and, in turn, boost activities at the stock market.