Asset Valuation and Residual Risks to the Nigerian Financial

Report
Asset Valuation and Residual Risks to the
Nigerian Financial System After the
Banking Crisis Resolution
Mohammed Garuba
Partner, CardinalStone Partners Limited
Presented at the NDFF 2012 Conference, Guoman Tower Hotel St. Katharine's Way,
London,
24 May 2012
Introduction
Economic Overview
Key Highlights
 The Nigerian economy is the 30th largest economy in the
world and the 2nd largest in Sub-Sahara Africa with GDP
of US$413 billion in 2011, only after South Africa with
GDP of US$555 billion in the same year. Agriculture
accounts for about 40% of Nigeria’s GDP, though crude
oil is the country’s major foreign exchange earner
 Crude oil output has been on the increase since 2009
due to reduced militants’ activities in the Niger Delta
region
- Nigeria is the largest oil producer in Africa, with average
crude oil production output of 2.525 mbpd in 2011
(2008: 2.165 mbpd)
 With a population of about 167 million people, about 61.5
million (2011 est.) constitutes the country’s labor force
 It is expected that the reforms currently undertaken by the
Jonathan administration will be completed by 2015
 Key reforms in the economy include:
- Privatization of the power generation and distribution
companies to solve the lingering power problems
currently
faced by the country
- Deregulation of the downstream petroleum industry to
free up more funds for infrastructural and social
development
Source: World Bank Economic Indicator
3
What lead to asset valuation bubble

Increase in the minimum capital for banking license from N2 billion to N25 billion announced in July
2004 which was effective December 2005 lead to industry consolidation resulting in the decrease of
banks from 89 to 25

Nigerian banks raised about N2.0 trillion between 2004 and 2008

Universal banking and its antecedent risks lead to unmanageable growth and poor corporate
governance.

Excess liquidity in the financial system and a rapid increase in credit lead to excessive consumption
and bad loans

Due to lack of innovativeness for high return products, banks had limited opportunities to create
quality risk assets

Accumulation of huge unsecured risk assets in banks portfolio and high leverage to the stock market
and real estate sectors

Huge inflows of foreign portfolio investments into Nigeria and other frontier markets
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What lead to asset valuation bubble (cont.)

Poor or even non-existent risk management oversight in most Nigerian banks led to the
concentration of assets in certain risky areas

The significant exposure of the banks to the capital market via margin loans and direct equity
investment threatened banking sector stability, as some banks had their capital fully eroded .

Deplorable internal control processes in banks and lax regulatory oversight influenced poor
corporate governance and ethical value system

Liquidity drove the proliferation of financial products which were not well tested or fully
understood and this allowed for professionally concealed frauds and high level manipulation of
financial activities

Lack of coordination between regulators in the financial market – CBN, NSE and SEC.

Poor regulatory oversight in the capital market lead to price manipulation, over trading and
unsupervised capital raising
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What lead to asset valuation bubble (cont.)
Trend in the Equity Market
All-Share Index Performance in 12 years of Democracy
Source: Nigerian Stock Exchange
7
Intervention & Reforms
The Nigerian Economy

The Central Bank of Nigeria together with the Federal Ministry of Finance in making sure there was
stability in the financial system after the burst of the asset bubble set up the Asset Management
Corporation of Nigeria (AMCON).

AMCON was set up for the purpose of efficiently resolving the non-performing assets of Nigerian
banks thereby helping to achieve equilibrium pricing across most asset classes.

AMCON as a resolution vehicle absorbed the toxic assets of intervened banks and provided liquidity
to facilitate the re-capitalization of the banks.

AMCON adopted a fair and transparent valuation basis for the acquisition of margin loans, nonperforming loans and bad loans which lead to timely execution for each tranche asset acquisition.
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Intervention & Reforms
AMCON has acquired significant Eligible Bank Assets (EBAs)
DECEMBER 31, 2010
APRIL 6, 2011
DECEMBER 28, 2011
• EBA Value Purchased
• EBA Value Purchased
• EBA Value Purchased
N2.46 trillion
N885.3 billion
N675.2 billion
• AMCON Purchase
• AMCON Purchase
• AMCON Purchase
Price – N866.2 billion
Price – N515.2 billion
Price – N377.8 billion
• All Banking Sector Margin Loans
• Non-Margin NPLs acquired
• Systemically important Loans
• All NPLs of Intervened Banks
from 22 Nigerian DMBs
• Repricing of acquired EBAs
AMCON purchased total EBAs worth N4.02 trillion at a price of N1.76 trillion
Source: AMCON’s website, April 2012
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Post AMCON intervention

The Central Bank of Nigeria (“CBN”) will embark on another round of stress test to reduce systemic
risk. CBN to embark on further stress testing and this will help achieve more confidence for the
general public.

Regulators requesting forbearance of loans of 95 stockbrokers amounting to N91 billion and foreclose
on the collateral.

AMCON, in its bid to support the capital market reforms, is in discussions with various service
providers with a view towards creating new products such as ETFs, unit trusts, etc. from its AUM

Rapid pace of financial innovations to help stabilize the market.

AMCON will embark on additional NPL purchase over time in line with the CBN mandate of capping
banking industry NPLs at 5%.
Source: CardinalStone Research
10
Performance of Nigerian Equities versus regional & global
peers
Overview
NSEASI/African Markets
 NSEASI has lagged African peers in the recovery from the
global financial crises despite significant improvement in the
profitability of quoted companies. This has resulted cheaper
market valuations relative to peers
 The Nigerian stock market is not immune to events in the
global economy and markets. Recent trends show significant
correlation between the NSEASI and global market indices
 Less volatile currency (in the last 12 months) relative to peers
like the South African rand and the Kenyan Shilling
African Currencies/USD
Source: CardinalStone Research
NSEASI/Developed markets
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Risk Considerations
Inherent risk
 An Economic downturn
 Foreign Investor risk
 Foreign Exchange Risk
 Regulatory and accounting changes
 Infrastructure risk
 Interest Rate Risk
 Operational Risk
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Concluding Remarks

Banking sector reforms adopted in Nigeria in response to the financial crisis have so far yielded
positive results as the reforms were carried out without depositors losing their money

All the Nigerian banks have been fully recapitalized and relative stability has been restored to the
financial system

It was very good that no bank was allowed to fail

AMCON will be judged by the level of its impact on the economy and its antecedent cost to the
economy

Regulators will need to work together to create a balance in the financial market.

Research has shown that periods of high international capital mobility have repeatedly produced
international banking crises, especially if there’s inadequate regulation and supervision at the time of
deregulation.

Source: CardinalStone Research
The
savings and investment culture amongst local investors in Nigeria needs to improve.
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Thank you for your attention
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