Sanusi Lamido, governor, CBN worried by the negative perception occasioned by the delay in disposing of the rescued banks, the Central Bank of Nigeria (CBN) is proposing that the Asset Management Corporation of Nigeria (AMCON) will focus initially on purchasing qualifying non-performing loans (NPLs) along with the associated rights to underlying collaterals, when it becomes operational.

Consequently, the apex bank, which has embarked on reconciliatory moves of late to stir dwindling confidence and also carry major stakeholders along in its ongoing reform programme, would want AMCON to concentrate on margin loans given by banks badly hit by the capital market crash, as they are easier to value. Specifically, the development is expected to restore Negative Asset Value (NAV) – bank’s total assets minus total liabilities – through taking over of the bad loans by AMCON, so as to be able to report positive shareholders’ fund. Shareholders’ fund is capital invested in a business by its shareholders, including retained profits or part of a bank’s financial assets consisting of share capital and retained earnings. It is an alternative term for owners’ equity.

The implication is that investors, both local and foreign, will be encouraged to resume talks with CBN-appointed holding managers of the rescued banks which broke down due to fresh discoveries after the due diligence carried out by some of them on the embattled banks. Ultimately, these investors will be expected to contend with the minimum capitalisation, when the problem of shareholders’ funds is solved by the corporation.

In fact, in the wake of the capital market boom in 2008, the banks dipped into shareholders’ funds to purchase, under fictitious names and proxies, shares under the much abused margin loans. But banks, particularly the rescued ones, are not helping matters as they are still charging interest on some margin loans entered in their books as bad, and which AMCON is expected to purchase.

For instance, an acceptance of the letter of resignation from one of the distressed banks to an ex-staff says: “Kindly note that your public offer loan is running at 16.0 percent beginning from your resignation date.” In another instance, dividends that accrued to the shares of the same loan have been taken over by the bank through letters dated September, November and December 2009 from the registrars to the head office of the bank.

However, CBN is said to be disturbed by the delay in the disposal of the distressed banks through mergers and acquisitions, but observed that the only way to reverse the trend is through positive shareholders’ funds.

Interestingly, AMCON is also expected to distribute those assets to investment managers, who will have the option of taking a variety of portfolios through an investment strategy that will be defined by it. This could be through selling some of the shares and going into real estate. Besides, CBN sees it as a vehicle for distributing losses between the banks and the brokers, following the capital market loss of about 70 percent to the crisis.

Justifying CBN’s position, Razia Khan, global head of macro economic research, Standard Chattered Bank said: “In the case of any asset management company, one would expect it to buy assets that can be easily valued first – in this case margin loans – as there is a market for it. Even if higher than market prices are paid for the assets in order to recapitalise the institutions, this is standard practice with AMCs the world over.”

Johnson Chukwu, managing director and chief executive officer, Cowry Asset Management Limited, said: “What the CBN means is that AMCON will basically start with taking over the bad loans of the troubled banks and the collaterals which were used to secure the loans. This action is intended to make sure that their net asset value, which, for the troubled banks is all negative, will be reversed to positive. As you know, the NAV, which is the same thing as the shareholders’ funds is negative for the troubled banks because they had to take losses from their non-performing loans.

 ”When these loans are taken over by AMCON, the banks will write back the huge provisions they made for the loans into profit or extraordinary income and if the write backs are as high as their negative NAV, they will be able to report positive shareholders’ fund. For the banks to be attractive to new investors, be they local or foreign, they need to have positive shareholders’ funds.

“For instance, if an investor has to take over bank A today, he has to first inject over N200 billion to bring its shareholders’ fund to positive before injecting another N25 billion to meet the minimum capitalisation for banks. If, however, AMCON is able to reverse the negative shareholders’ fund, then the new investor will only have to contend with raising N25 billion.”

Akinbamidele Akintola, research analyst, Renaissance Group, was of the opinion that given the 10-year life span for AMCON, it will be in a position to manage the loans for recovery, post-capital injection, adding that “it would remain a part of CBN regulatory infrastructure going forward to reduce NPL levels in banks.” He however called for a clear and transparent valuation model for taking over the loans.