By Jonah Nwokpoku

Fitch Ratings has said that sourcing funds to establish a second Asset Management Corporation of Nigeria (AMCON2) might be difficult as it would be challenging to convince private investors to acquire   banks’ non-performing loans (NPLs) at a time of heightened economic recession.

Fitch stated this in a statement issued yesterday titled; “NPL sale would provide respite for Nigerian banks.”

Vanguard reported on Monday that the Nigeria Deposit Insurance Corporation, NDIC, and the Central Bank of Nigeria, CBN, have set up a joint committee to explore the establishment of another Asset Management Company, AMCON2, to acquire NPLs  of banks.

According to Fitch: “Efforts to establish a specialised company to acquire Nigerian banks’ non-performing loans (NPLs) will, if successful, ease mounting asset-quality problems. Press reports suggest the Central Bank of Nigeria and Nigeria Deposit Insurance Corporation have set up a committee to discuss the plan.

“NPLs in the sector are increasing rapidly, reaching 11.7 3 percent of gross loans at end-June 2016 from 5.3 percent  at end-2015. The operating environment for banks is becoming increasingly difficult as recession, weak oil prices and exchange rate pressure combine to make it more difficult for borrowers to service their loans.

“The Nigerian authorities have allowed banks to speed up the write-off of fully reserved NPLs since July 2016. This is intended to encourage banks to clean up their balance sheets and help them comply with the 5 3 percent  NPL/total loans ratio the central bank uses as guidance for the banks. The write-off measures have little impact on our assessment of a bank’s asset quality because we take a view on the adequacy of a bank’s loan loss reserves and consider its NPLs less loan loss reserves in our assessment of loan quality. Fitch-rated Nigerian banks’ NPLs at end-June 2016 were reserved at 62% and our ratings already factor in an assessment of loan loss cover adequacy.

“Setting up an asset management company (AMCON2) to acquire NPLs would in our view be a more significant and credit-positive measure. If successful, and depending on transfer pricing agreed, it could result in real improvement in the banking sector’s asset quality. Sectors experiencing difficulties include oil and gas, utilities, manufacturing and trading.

“AMCON2 would follow AMCON, established in 2010. This company, funded by the issuance of federal government zero-coupon bonds, the central bank, and later by a levy on banks’ assets, removed NPLs from the banking sector, making banks better positioned to lend to the real economy. AMCON continues to operate, having recovered 56 per cent of the value of total loans acquired from the banks. It also acquired failed banks and stakes in failed banks.

“Funding of AMCON2 might prove difficult. Press reports suggest that the government intends it should be funded by the private sector, but convincing private investors to acquire NPLs at a time of heightened economic difficulty might prove challenging.”