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Nigerian banks “one of the best prospective investment areas in the world”

The Asset Management Company of Nigeria (AMCON) was created by the Nigerian Central Bank and Ministry of Finance to stabilise the banking sector following the special audit in 2009. Mishnah Seth, frontier markets analyst at Investec Asset Management, believes it will boost the country’s banking sector.

The Central Bank of Nigeria (CBN) commissioned a special audit of their banking sector in 2009, which saw nine of the country’s 24 banks declared ‘unhealthy’ due to liquidity, asset and capital adequacy concerns and poor governance practices. In an effort to stabilise the sector, AMCON was consequently created as a means to purchase non-performing loans from the banking sector to recapitalise the unhealthy banks, which should boost confidence and subsequently liquidity in the sector.

Following AMCON’s self-imposed 31 December deadline, it purchased non-performing loans of 21 participating banks at a total face value of around N2tn (approximately $13.3bn) – the equivalent of 65% of the banking sector’s total non-performing loans as at March last year for an effective consideration of N800bn ($5.3bn) in zero-coupon bonds. Non-performing loans acquired from the healthy banks represented less than 10% of the total thereby supporting our premise that they will not directly be the primary beneficiaries of the AMCON buy-back programme.

Repurchases of the bonds issued will be limited to 25% up to the first anniversary of the bond issuance, a further 25% up to the second anniversary and the balance up to the third anniversary. Banks will make use of this facility if they need cash for lending purposes – ensuring that liquidity is available in the banking system.

Right from the outset of Governor Lamido Sanusi’s appointment in June 2009, the CBN has impressed with its swift and decisive actions. The only African country to experience a banking crisis in 2008, Nigeria managed to avert a run on its banks, and – unlike the UK in 2008 – there were no scenes of long queues in front of barricaded banks.

The AMCON was the vital first step to recapitalise the failed banks, facilitating their take-over by new shareholders and their return as functioning banks. It will have several positive implications for the sector:

  • We believe that by buying up margin loans from the sector some progress will be made toward removing the over-hang in the stock market, as AMCON has an intended lifespan of ten years in which to wind down its operations.
  • AMCON activities could also release liquidity in the system, as surplus liquidity is currently being siphoned off to the distressed banks through the inter-bank market.
  • The removal of non-performing margin loans from the balance sheets of healthy banks will have a positive impact on their lending activities in 2011. However, the events of the past 18 to 24 months are bound to make this a gradual process.
  • While the failed banks are the chief beneficiaries of the AMCON programme, the healthy banks will be able to book some profits (to the extent that the AMCON consideration received exceeds the value of the written-down assets in their books). However, we estimate the total write-back for the healthy banks to be minimal, providing less than a 2% Return on Equity enhancement to 2010 earnings.

The 2008 banking crisis resulted in sharply lower share prices across the sector. Not only did investor sentiment and thus share ratings suffer, but the operating environment for banks deteriorated as the sudden withdrawal of funding for many businesses in the real economy prolonged the impact of the crisis. Both the initial damage control and the subsequent clean-up have been handled very well by the CBN.

In our view, the sector is well on its way to recovery. We believe that well-managed, well-capitalised banks in Nigeria are exciting growth assets – something that is not reflected in the share prices today. Loans to GDP of approximately 30% and a banking penetration of around10% in Africa’s second largest economy suggest significant scope for future growth. This makes Nigerian banks one of the best prospective investment areas in the world.

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