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Tuesday, March 21, 2023

Nigerian Banks Would Have Made Profit of N637.14bn without AMCON Charge

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Nigerian banks would have recorded a combined net income of N637.14 billion in the second quarter, which would have been higher than the N441.12 billion they eventually posted  if the mandatory regulatory charges were not in their cost structure.

Every lender is required to make an annual contribution of 5 bases of their total asset, that Management Corporation of Nigeria (AMCON) charges them.

AMCON was established to help buy bad loans and salvage the industry from collapse following the financial crisis of 2009, and is expected to wind up by 2023.

The largest banks collectively incurred AMCON charge of N196.02 billion in June 2021, which is higher than 2020’s N156.57 billion, according to data gathered by MoneyCentral.

For some the resolution cost is the largest expense item after staff or personnel cost. The regulatory levy is 20.30 percent of the combined total operating expenses.

It appears lenders will continue to be in perpetual pain as the regulator has announced new rules or the establishment of a sinking bank fund to replace AMCON.

The Federal Government through the central bank plans to start the fund that will operate as a bridge bank to help invigorate beleaguered companies.

Every lender will be required to make an annual contribution of 10 basis points of their total assets. Analysts say it is better for banks to bail themselves out since they created the toxic assets, instead of using taxpayers’ money for such an exercise.

“It will be a burden on them if the new charges the government is planning to initiate is added to AMCON charge, but self-insurance is good,” said Wale Okunriboye, equity research analyst at Sigma Pensions Limited.

“When there is a crisis, the government will take money from the resolution pool and bail the banks out,” said Okunrinboye.

Analysts say the bridge bank will replace AMCON which has a N4 trillion liability in the central bank’s balance sheet, and they added that the Corporation doesn’t have the money to meet its obligation.

In 2013, the IMF, through its Article IV Consultations (No. 13/36 of March 28, 2013), a tool the organisation uses to evaluate the effectiveness and context of a country’s economic policies and management in dealing with macro-economic stability and fostering growth, advised the government to wind up AMCON to curb moral hazard and fiscal risk.

Aside from the resolution charge, inflationary pressures due to an idiosyncratic and unfavorable macroeconomic environment are also responsible for spiraling operating expenses as sector players are spending more to generate profit.

They collectively incurred 965.96 billion in operating expenses in June 2021, which is 46.41 percent of cumulative revenue of N2.08 trillion, based on MoneyCentral calculations.

With rising sundry costs and stringent rules such at the high cash reserve ratio, little wonder banks’ return on equity have been deteriorating.

Zenith Bank’s AMCON charge increased by 22.52 percent to N37.92 billion in June 2021 from N30.94 billion the previous year; the resolution cost is 25.81 percent of total operating cost.

Its costs are rising higher than the rate of income as cost to income ratio increased to 56.10 percent in June 2021 from 54.30 percent the previous year.

Access Bank Plc’s AMCON charge was up 17.13 percent to N41.50 billion in the period under review from N35.43 billion the previous year; the resolution cost is 21.87 percent of total operating expenses.

FirstBank Holdings Plc’s resolution cost increased by 35.43 percent to N30.67 billion in June 2021 from N22.65 billion the previous year.

Its cost to income ratio rose to 68.60 percent in the period under review from 65.80 percent the previous year.

Guaranty Trust Holding Company Plc’s AMCON charge grew by 27.25 percent to N21.88 billion in June 2021 from N17.20 billion the previous year.

Its cost to income ratio increased to 48.98 percent in the period under review from 43.16 percent the previous year.

United Bank for Africa (UBA)’s AMCON charge was up 24.10 percent to N27.82 billion in June 2021 from N22.41 billion as at June 2020.

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