A bridge to profitability: The government looks to sell three nationalised banks

Following the August 2011 acquisition of three so-called bridge banks by the Asset Management Corporation of Nigeria (AMCON), the federal government now finds itself the largest single owner of bank stock in the country. With foreign investors and mid-tier domestic banks having expressed interest in purchasing these formerly distressed assets, AMCON is currently weighing its sale options. Although the agency has said that it is in no rush to sell these banks, AMCON could find itself under pressure as it seeks to refinance its bonds that will mature in 2013.

FIGHTING FIRE: The downturn in the equity markets and the drop in oil prices starting in 2008 laid bare severe breaches in corporate governance at many of Nigeria’s banks. As non-performing loan (NPL) ratios soared and the interbank lending market froze during the first half of 2009, the Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Corporation (NDIC) took action. By July 2009 the two had launched a joint audit of all 24 banks, publishing their results in August. Finding nine lenders to be severely undercapitalised, the regulator moved swiftly to inject some N620bn ($4bn) into these lenders, as an initial step to stabilise the market. However, by July 2010 it became apparent that recapitalisation and consolidation would not proceed smoothly given widespread scepticism regarding the strength of the affected banks’ balance sheets.

The National Assembly then passed a bill in July 2010 establishing AMCON as a “bad bank” for the sector, which was designed to purchase toxic assets from any bank, but with an initial focus on those that had been bailed out by the government. AMCON proceeded to issue three-year bonds, yielding 11.8%, which it then used to purchase NPLs from banks at a discount, with the exact rate depending on the type of asset. First, loans used for the purchase of stocks were acquired at a 60% premium on third-quarter 2010 equity prices. Second, for loans with collateral, mostly property, AMCON accepted bank valuations with a claw-back option. Third, AMCON valued unsecured loans at 5% of the principal.

The bulk of NPLs from the intervened banks and all banks’ loans to purchase stocks – a total of N2.46trn ($15.7bn) in eligible bank assets – were acquired in December 2010 for a total of N866.2bn ($5.5bn). This was followed by acquisitions of a further N675.2bn ($4.3bn) in NPLs in April 2011, for N377.8bn ($2.4bn). Then in December 2011, AMCON acquired loans with a face value of N885.3bn ($5.6bn) at a cost of N515.2bn ($3.3bn).

While not expected by banking industry analysts, this final tranche included the re-pricing of assets acquired under the first round, as well as a number of “systemically important loans” to high-net worth individuals who had defaulted. By the close of 2011 AMCON had accumulated a total of N4.2trn ($26.9bn) in NPLs at a price of N1.76trn ($11.3bn).

BRIDGING THE GAP: For the banks that received capital injections from the government in 2009, they were told in May 2011 that they needed to recapitalise – either on their own or via an acquisition – or else face nationalisation. Five lenders were able to find buyers in 2011, leading to significant changes in the market’s structure. Ecobank was the biggest gainer in terms of scale, thanks to its purchase of Oceanic Bank, increasing its market share from 3% to 9%. Two mid-tier banks – Access Bank and First City Monument Bank (FCMB) – were catapulted into the top tier of lenders with their acquisitions of Intercontinental Bank and Finbank, respectively. A smaller takeover, of Equatorial Trust Bank by Sterling Bank, saved the lender from nationalisation, as did the $750m recapitalisation of Union Bank by a consortium led by Nigerian private equity firm African Capital Alliance. These merged banks could achieve economies of scale in the long run, but a near-term challenge will be to harmonise operations and dispose of excess branches and resources.

GOVERNMENT TAKEOVER: While the majority of the bailed-out banks were able to recapitalise or find partners, it had become apparent by August 2011 that, despite the efforts of AMCON to soak up the bad loans in the system, three of the banks were still in trouble, with negative asset values and equity levels that were quickly eroding, and with no partners in sight. Concerned that these institutions might present a systemic risk, the NDIC moved to seize the assets of the three lenders, delisting them from the stock exchange, while the CBN replaced their management in July 2011. Then in early August the NDIC established bridge banks for each of the lenders. Bank PHB was renamed Keystone Bank, Afribank became Mainstreet Bank and Spring Bank re-emerged as Enterprise Bank. All three bridge were then sold to AMCON at a cost of N736.9bn ($4.7bn) FINANCING PURCHASES: Since its inception, AMCON has received several sources of funding, starting with share capital of N10bn ($64m) provided each by the CBN and the Ministry of Finance, plus access to an initial N500bn ($3.2bn) in debentures from the CBN. In theory AMCON can earn money from the sale of the distressed assets that it buys, but the government, concerned that this might not be sufficient to pay off the AMCON bonds, set up the Banking Sector Resolution Trust Fund (also known as the sinking fund) in early 2011.

The CBN will provide N50bn ($320m) per year to the fund, and all banks will be required to contribute an amount equal to 0.3% of their asset base to the fund annually. The CBN expects contributions to last roughly a decade and has capped the timeframe at 15 years. According to AMCON’s calculations, this could generate a significant amount of money, almost N4trn ($25.6bn) over the next 10-15 years, equivalent to 63% of the cost of the agency’s obligations. The balance is expected to come from the recovery of eligible banking assets (20%), net reinvestment income (8%), disposal of interests in intervened banks (5%) and the disposal of AMCON (3%).

However, these projections have been criticised as optimistic by some industry players, particularly with respect to the size of the sinking fund. Some doubts also surround the valuation of distressed assets acquired by AMCON from the banks. While stock prices remain at below third-quarter 2010 prices as of mid-2012, AMCON’s liquidity position remains in doubt and these stocks will have to be held for some time. Concerns also linger over how easily the claw-back clause on property valuations might be exercised. A lacklustre market does not provide for ready sales of large amounts of assets.

TURNAROUND: But one good sign is that the nationalised banks seemed to be doing well, having quickly rebranded in early 2012 and with turnaround strategies that are already under way. “AMCON has played a pivotal role in bringing back confidence to the financial markets, including putting a lot of resources into these bridge banks and will need to spend a few years preparing them to optimise returns when these are sold. How these banks will be divested will depend on the optimal way to ensure returns are in line with the efforts expended,” Rotimi Oyekanmi, the group head of Ecobank Capital, told OBG. “There are issues that will need to be addressed, but we are sure that AMCON will manage these.”

The largest of the nationalised banks, Mainstreet is expected to fetch the highest price. But the lender’s scale presents its own hurdles. “Of the three banks taken over, Mainstreet Bank was the most challenging because of its age and legacy issues,” the bank’s CEO, Faith Tuedor-Matthews, told local press in May 2012 in the face of union protests over the bank’s restructuring and shedding of 800 staff. The bank was recording monthly losses of N2bn ($12.8m) in 2011, but management hopes to regain its position in the ranks of Nigeria’s top four lenders over the medium term by leveraging its 220 branches.

Meanwhile, Keystone was close to a deal with Pakistan’s Habib Bank in 2011, but the former Bank PHB had to receive an N296.9bn ($1.9bn) investment from AMCON in August 2011 to regain positive net asset value. A key strategy for the bank to return to profitability in 2012 lies in its focus on retail and consumer lending. The bank has also sought growth in its corporate book by financing state-government initiatives, partnering with the states of Kwara and Bayelsa to look for projects in road construction, power supply and hospitality. It is also working with the World Bank’s International Finance Corporation to develop its reach in the crucial small and medium-sized enterprise segment as well as trade finance.

The smallest of the three rescued banks, Enterprise (the former Spring Bank) has restructured operations under new management and is retiring 140 staff and upgrading IT systems. Enterprise may not have the scale of some of its competitors, with just 1.5m (including dormant) accounts, but the bank expects to make up for its small size with efficiency and profitability. In the short run, it is focusing on corporate deals to rebuild its balance sheet, but retail ambitions remain to the fore. The bank expects to launch a strategy focusing on the retail segment based on its existing network of 153 branches nationwide, which it has been modernising to include ATMs at every branch.

While these banks’ balance sheets are likely clean, it will take some time to cut costs and restructure core processes to place them firmly on the path to profitability, and sceptics have called for greater disclosure. “They say they have cleaned up these banks’ balance sheets, but let them produce financial statements on a timely basis to prove it,” Bode Agusto, the co-chairman of the Lagos Economic Summit Group, told OBG. “A crucial issue is that these banks are now much smaller than before, yet their cost structures remain relatively unchanged.”

DIVESTMENT OPTIONS: When it comes to selling these banks, AMCON faces three options for potential buyers: a strategic investor, another bank, or an initial public offering. The agency claims that it received expressions of interest from 20 potential investors during the first half of 2012, although valuations proposed thus far have been too low for an immediate sale. In July 2012, AMCON appointed advisors for the sale of the three but emphasised it would not rush the process. “We’re happy to hold them for now, we’re not selling,” AMCON’s CEO, Mustafa Chike-Obi, told local press in June 2012, announcing a deadline of 2014 for divestment.

Despite the search for the best valuations, AMCON could come under increasing pressure to proceed with divestment. “The most likely scenario for AMCON’s disposal of the banks will be for private equity investors to bring their management experience to bear on these institutions,” Agusto told OBG. “If the disposal is delayed for too long, their equity will be eroded and more capital may be required.”