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Valuation criteria: Will AMCON walk the talk?

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by Babajide Komolafe

Cautious optimism have greeted the valuation criteria issued by Asset Management Company of Nigeria (AMCON) last week for purchasing bad debts from banks as industry experts  said  that  translating words in to action is  the litmus test the company must pass to gain market confidence and  unlock the flow of credit into the economy.

AMCON was set up to purchase the toxic assets of banks estimated at N2.2 trillion. This  is expected the provide the banks with the much needed liquidity increased lending in the economy. Though the AMCON initiative was welcomed as a way of resolving the problem of huge non_performing loans which crippled the industry last year, with the apex bank intervening in eight banks, there have been concerns on the valuation method that would be used to value the toxic assets of the bank.

The Value of bad debts to be purchased
Perhaps in recognition of these concerns, the board of AMCON  at its maiden meeting  not only decided to purchase the debts , it also agreed on the criteria for valuing them  The valuation criteria were announced in a press statement as follows;

Margin loans i.e  non_performing loans (NPLs) backed by shares of listed companies.  ‘’AMCON will purchase the loans at  an implied premium of approximately 60 per cent  on the 60_day average of recent prices ending November 15th 2010’’.

Secured loans i.e  non_performing loans (NPLs) backed by other perfected collateral:  ‘’AMCON will accept the most current estimate of the loan value supplied by the institution. The estimate must be based on current market analysis of the collateral and a written guarantee of good faith by the institution. Additionally, there must be a post_transaction adjustment agreement that allows AMCON to independently value the loan as of the transaction date of November 15th 2010.’’
Unsecured loans _ AMCON will purchase these loans at 5 per cent of the principal value.

Fair and GenerousThat is how banking experts described the valuation criteria. ‘’It is fair enough, not as stringent as expected’’, commented Goodwill Iyamu, a senior bank treasuer.

‘’Fair, more than fair. Accepting to purchase stocks at 60 per cent premium, that is fair enough’’, said Lookman Ismail, another senior bank treasurer.

This view was also affirmed by Opeyemi Agbaje, Chief Executive, …..He said, “The methodology of purchasing at a 60 per cent premium on average stock prices till Nov 15 is fair given that capital markets have been depressed significantly. The other elements for non_margin accounts are also fair in my view.

In the same vein, the valuation criteria were considered by Razia Khan of Standard Chartered, London, as ‘’more than fair _ very generous in fact _ to the banks’’.

The generosity of AMCON’s valuation criteria is however considered as an attempt by the CBN and the government to provide a soft landing for the banks and restore confidence in the economy.

‘’The need to save the banking industry must have influenced the criteria’’, Ismaila said. Iyamu believes that the valuation criteria represents a coordinated soft landing for the banks.  Khan  opined that the motive behind this generosity  is to recapitalise the banks. She said in an email response, “Although the press release (issued by AMCON)  suggests that this valuation is solely for the purpose of buying NPLs (non_performing loans), rather than the recapitalisation of banks, conventional wisdom suggests that NPLs are only ever purchased at a premium if the intention is at least the partial_recapitalisation of rescued institutions through asset purchases.  However, the insistence that this is not about recapitalising the banks may be aimed at managing expectations.’’

Her view was confirmed by  Mr.  Mustafa Chike_Obi , chief executive of AMCON while speaking on CNBC Africa Television on Tuesday comments.  He said most of the banks rescued last year would require further funds to get them to minimum capital adequacy levels even after AMCON had absorbed non_performing loans and returned shareholders’ funds to zero. “Part of their negative capital is the debt, or the loans, that the central bank has advanced to them,”

Will these  unlock credit?

One of the thinking behind the creation of AMCON is that it would help unlock the flow of credit into the economy. It is believed that by purchasing the bad debts of banks, the banks would have money to lend to the economy.  Though analysts were confident that the valuation criteria would impact lending positively, they however said this impact is conditional.  Iyamu said that the generous valuation would immediate translate to write_back of loan losses hence increased profit for the banks. ‘’It is however doubtful if this will  encourage lending and return businesses to normal’’, he added

On his part, Ismail said that the valuation will first provide liquidity and give the banks the chance to start on a clean slate. “How soon this will happen and translate to increased lending will be determined by how soon AMCON gets its acts together and put their words into action’’, he said. ‘’It is one thing to speak and another thing to transform words into action. By coming out with these valuation criteria, people would now perceive them as people who know what they are doing.

But the real impact depends on how they can transform their words into action’’, he said.

A similar note of caution was sounded by Khan. She said  the valuation criteria though  would boost credit but not immediately and the boost in credit will not be as huge as the amount of bad debt to be purchased by AMCON.

‘’ Although little detail is provided in this press release, our understanding  _ based on previous media interviews _ is that 7_10Y FGN_guaranteed bonds will be offered to financial institutions by the AMCON, in exchange for the asset purchases.  Should banks need the liquidity, these bonds will then be eligible as collateral for borrowing from the CBN window.

Thus, although the size of the asset purchase is far greater than the amount initially expected by the market, the AMCON announcement should not be seen as a wave of liquidity set to impact the Nigerian market by the end of the year.  The actual effect of the asset purchases is likely to be far more subdued than the NGN 2.2trn announced, with the rise in money supply dependent on the liquidity requirements of the banks.

‘’Nonetheless, both Nigeria ‘s rescued institutions and other banks with exposure to margin trading will benefit from the AMCON’s asset purchases, and access to liquidity, when required.  The cleaning up of banks’ balance sheets following the purchase of NPLs by the AMCON, should finally put in place the conditions required  for the resumption of more rapid credit growth in Nigeria.’’

Renaissance Capital Economist Yvonne Mhango also opined that resumption of credit would not be immediate.  “Credit growth is poised to recover from the second half of 2011 after sluggish growth in 2010,” and the “recapitalization of the distressed banks will underpin a recovery in credit growth.” She said in an e_mailed report on Thursday

What is in it for Man on the Street?

By buying shares held by banks as collaterals for loans, estimated at….and holding for two years, AMCON will help reduce sell pressure on the stock exchange and hence address decline in share prices and also facilitate price increase.

As a result investors whose money have been trapped in the exchange during the meltdown might opportunity to recovery their money (even at a gain) and hence have liquidity to engage in other business activities that would create jobs and income. Also banks will definitely use the increased liquidity from AMCON to do more business either through direct lending to businesses and individuals or project financing e.g infrastructure. Either way, this is expected to translate to more business activities, jobs and income in the economy in the long term.

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