AMCON (Asset Management Company of Nigeria), the bad debt bank is now officially a bad bank. With the latest announcement of a N628 billion loss after tax in its 2013 full year results, the bank that saved other banks, now looks like a bank that needs to be saved.
For three years, AMCON has consistently made losses. AMCON’s cumulative loss in the last three years stands at N3.77 trillion ($23 billion). This could easily go down in history as the biggest loss making organization in the world currently, if not historically.
A look at the bank’s financials shows it made a loss of N702 billion in 2012 and the biggest loss, in its three year history, of N2.44 trillion in 2011.
AMCON’s loss arises mainly from its business model.
It is bad bank that has taken on too many toxic debts that are beginning to poison it to death slowly and painfully. For example, the bank’s 2013 full year financials shows that it has on its books “debts issued and other borrowed funds” amounting to N3.57 trillion. These are bonds issued to pay for the toxic debts it acquired from commercial banks.
This is in addition to “other liabilities” of N1.69 trillion and liabilities due to customers within the next one year of N710 billion. AMCON plans to redeem part of its bonds this year. The bad bank’s total liabilities as at end of 2013 stood at N6.023 trillion while total assets stood at N2.54 trillion. In effect, AMCON’s liabilities outstripped its assets by 2 to 1.
This is not good. Any bank in this situation is effectively a distressed financial institution. AMCON’s had a negative capital position of N3.49 trillion as at the end of 2013, perhaps the worst capital position of any financial institution in the world. This is a bad bank that has really gone bad.
The unhealthy nature of AMCON’s balance sheet is seen in the bank’s income statement. In 2013, the bank made an interest income of N181 billion representing a 21% increase in 2012 interest income of N149 billion. This would have been good news except for the fact that AMCON ended up spending N557 billion as interest expense. This resulted in the bank having a negative interest margin of N376 billion.
What this clearly shows is that AMCON has not been able turnaround most of the loans it bought from Nigerian banks three years ago. This is why AMCON is still bleeding, three years after acquiring the loans.
AMCON suffered a net operating loss of N508 billion in 2013 after being forced to make a credit loss expense of approximately N77 billion and impairment provisions on financial investments of approximately N150 billion.
AMCON claims the impairment loss on financial investments relates to “N100 billion deposit for shares of Consolidated Discount House Limited. It is not clear why AMCON had to do this.
Perhaps, it is to ensure that banks that were exposed to Consolidated Discount House, which collapsed in 2013, were not forced to make provisions for the financial losses they suffered. This was effectively another bail out for the banks done quietly.
However, AMCON’s spent a whooping N121 billion running its operations in 2013, which also largely contributed to its massive loss position of N630 billion. AMCON spent N43 billion paying staff salaries and N69 billion as “other operating expenses.” A breakdown of other operating expenses reveals that AMCON spent N1.95 billion on “advertising and marketing.”
Bank charges gulped N1.35 billion, banking sector resolution fund N3 billion. AMCON also paid N1.83 billion as directors’ emoluments, splashed N2.5 billion on staff training and incurred N3.52 billion as deposit insurance premium.
AMCON 2013 financials also show it spent N6.81 billion to fuel aircraft, incurred N7.24 billion as general administrative expenses, subscription and system expenses of N2.933 billion and other undisclosed expenses amounting to N12.34 billion.
The N121 billion AMCON spent as operating expense in 2013 is already 20% higher than the N96 billion it received from the sinking fund set aside to support the operations of the organization. What this means is that if AMCON keeps spending at this level, the chunk of the sinking fund from the banks may just go into running the organization than paying down its heavy liabilities.
The big question running through the mind of many analysts is if AMCON will ever make some profits someday or even break even. The answer to this question is important since AMCON’s debts are indirectly guaranteed by the Federal Government. If AMCON at anytime finds itself unable to pay its significant N6 trillion liability, the Federal Government will have to pay. So the question is, will AMCON ever be in a situation to pay its liabilities?
If AMCON is ever to break even, it has to be in a position to recover a significant chunk of the bad loans it has taken on, or sell most of the assets it has taken as collateral at a profit. What are the chances of AMCON achieving this? The chances are not looking good so far. AMCON balance sheet does not show much recovery is taking place. Rather, it has had to write down some of these assets and make provisions for extra loans to bad debtors that it has been forced to advance.
Also, AMCON is also not doing well in the asset sales business, especially for the bank’s it acquired. For example, AMCON just sold Enterprise Bank for a reported N57 billion. This is a bank that AMCON had to recapitalize to the tune of N287 billion.
Selling it for N57 billion means AMCON is taking a loss of N230 billion on just one bank. If this is repeated for the other two banks AMCON owns, the bad bank will be talking a loss of almost N600 billion or more in the three banks namely; Mainstreet, Keystone and Enterprise Bank.
AMCON’s plan is to transfer most of its debts to the CBN by the end of this year and get more than a 50% discount on the cost of financing the debts. So, instead of the current 13% interest rate paid on the debts, the CBN is going to charge AMCON 6%. In effect, the CBN is going to subsidize the AMCON debts.
This will help AMCON halve its interest expense going forward, though this reduction will not be enough to stop AMCON from making losses unless it is able to improve recovery of the toxic assets on its books and reduce the cost of running its operations.
From all indications, the AMCON debt sinkhole is not going to be filled up soon. It is likely to get even deeper. There are two main reasons why this is so. AMCON has acquired too many toxic assets than it can effectively manage or has the capacity to manage.
The second reason is that the physical collateral, like properties and businesses AMCON has taken over will deteriorate with time, the longer AMCON holds on to them and in most cases the people with the capacity to buy these assets off AMCON are the same people indebted to the banks or are the friends and business associates of the indebted persons. So, AMCON will hardly ever get good market value for them.
As a way out, AMCON should immediately stop buying toxic assets from financial institutions, transform into a regulator of the bad debts market in Nigeria, sell all toxic assets in its portfolio to willing buyers in the private sector, take its losses and transfer outstanding liabilities to the Federal Government.
The financial institutions should continue to make their contributions to the AMCON sinking fund until the liabilities transferred to the government are liquidated. The AMCON experiment may not be working out as well as we wished. The earlier the government takes its loss, the less will be the cost of the mistake.
Source: Moneyissues
