Banks Groan Under Excessive AMCON Charges

In the last six years, Nigerian banks have incurred N850.89 billion in Asset Management Corporation (AMCON) charges as they groan under the excessive regulatory cost.

Bank insiders, equity shareholders and institutional investors whom MoneyCentral spoke to on this story believe that the Corporation created in 2010 has outlived its usefulness.

Sources tell MoneyCentral that since the Central Bank of Nigeria (CBN) has begun a parallel run of Basel III in November 2021, introducing more stringent measures around capital adequacy, liquidity and leverage, and the new CBN Act also grants powers to the CBN to make banks voluntarily contribute to another sinking fund for resolution purposes, it looks like overkill to continue to have AMCON existing.

The corporation charges 0.5 percent of Banks’ total assets on and off balance sheet items, as AMCON Charges, which is essentially a penalty on growth, as the higher the assets the higher the charges.

“AMCON was initially meant to have a 10-year lifespan but that was changed for it to have a life of perpetuity,” one source told MoneyCentral.

“Under the new Basel III rules for instance, banks are to hold a minimum capital conservation buffer (CCB1) of 1.0% and a countercyclical capital buffer (CCB2) to range between 0-2.5%. The CCB2 will be decided upon by the CBN based on macroeconomic conditions and developments within the financial sector.”

Both buffers are to be made up of Common Equity Tier 1 capital, MoneyCentral understands.

Further data gathered by MoneyCentral shows the largest financial institutions by market capitalization and total assets collectively incurred N205.30 billion in AMCON charge in 2021 alone, which is 24.56 percent higher than 2020’s N164.2 billion.

Asset Management Companies when introduced as a resolution mechanism for bad loan crises are often temporary, according to global best practices.

The Thailand Asset Management Company (TAMC) was established in 2001, following the Asian financial crises of 1997. Banks were required to transfer NPLs to the TAMC; private institutions were also eligible to transfer assets that met a more stringent set of criteria. The TAMC could restructure debt, reorganize businesses, and foreclose and dispose of property.

The TAMC had a predefined profit/loss sharing arrangement to be calculated at the fifth and tenth years of operations. The TAMC ceased operations in June 2011 and completed liquidation by June 2013. Over its ten-year lifespan, 780 billion baht (approximately $17.3 billion USD) in book value of assets were transferred for an approximate purchase price of 265 billion baht.

In 1998, Indonesia’s banking sector was undercapitalized, under regulated, and suffering from an excess of nonperforming loans (NPLs). In response, the Indonesian government devised the Indonesian Bank Restructuring Agency (IBRA) and its Asset Management Unit/Asset Management of Credits (AMU/AMC) as part of a three-pronged government emergency plan, along with a blanket guarantee of the debts of all domestic banks and a framework for corporate restructuring.

The AMU/AMC acquired and managed nonperforming loans from a variety of Indonesian banks and attempted to dispose of them. The AMU/AMC had acquired nearly IDR 400 trillion (approximately $86 billion) in face value of loans by April 2003. The AMU/AMC was wound down on its initially scheduled end date of February 27, 2004.

In Malaysia where Nigeria closely modelled its AMCON, Danaharta was established as a national asset management company as a part of the Malaysian government’s response to the Asian financial crisis.

Danaharta was a limited liability company owned by the central bank with the objective of maximizing NPL recovery values and purchasing unmanageable NPLs as a form of capital injection. Banks sold NPLs to Danaharta if their gross NPL ratio exceeded 10%, with the residual written down and restructured.

Danaharta appointed special administrators, foreclosed on property collateral, or took legal action for nonviable borrowers.

Over its lifetime, Danaharta’s portfolio totaled RM52.42 billion ($13.8 billion) in face value of NPLs, and it recovered RM30.35 billion (58 percent), and recognized a net loss of RM1.14 billion on RM8.94 billion total invested.

Danaharta ceased operations in December 2005, and the remaining RM2.88 billion in residual assets were transferred to a subsidiary of the Ministry of Finance.

Analysts say it is unfair for lenders to be mandated to pay for the mistakes of beleaguered peer rivals in perpetuity.

An industry expert who spoke to MoneyCentral on the condition of anonymity says market participants wonder what the corporation has been doing with billions of Naira in AMCON Charges, it collects from financial institutions.

Of course, the compulsory levy has added to lenders’ woes as it is the second largest expense item in their books, and that is on top of inflationary pressures, exchange rate movement and energy costs ballooning the cost to income ratio.

“We would love to stop it. However, the ten-year period is going to be extended. AMCON charges will continue to grow,” said Segun Agbaje, chief executive officer Guaranty Trust Holding Company (GTCO) Plc.

In the last six years, Zenith Bank has paid N166.23 billion in regulatory charges. Its AMCON charge increased by 22.56 percent to N37.92 billion in December 2021 from N30.94 billion the previous year. The levy makes up 13 percent of total operating expenses of N289.53 billion.

Between 2016-2021, Guaranty Trust Holding Company (GTCO) incurred N95.33 billion in AMCON charge, while the levy was up 27.20 percent to N21.88 billion as at December 2021. The regulatory induced cost is 13.84 of total operating expenses of N162.26 billion.

Between 2016-2021, Access Bank incurred N144.81 billion in regulatory induced costs. And it saw charges rise by 17.13 percent to N41.50 billion in December 2021 from N35.43 billion the previous year. The charge is 11.85 percent to total operating expenses of N371.25 billion.

In the last six years, United Bank for Africa (UBA) has incurred N110.79 billion in AMCON charge and it saw the levy increase by 24.81 percent to N27.97 billion in December 2021 from N22.41 billion the previous year. The regulatory cost is 10.09 percent of N278.95 billion.

“You begin to wonder if we still need NDIC because this is why banks pay a premium to NDIC every year., which is another regulatory cost for the same purpose. Depending on the bank’s risk assessment rating, the NDIC premium can be as high as 0.55 percent,” said a second industry analyst who doesn’t want his name mentioned.

Managing Director/Chief Executive, Asset Management Corporation of Nigeria (AMCON), Ahmed Kuru, also agrees that debt recovery under the AMCON scheme could not continue forever.

“Going forward, we will want to focus on how we close those transactions so that everybody can rest,” said Kuru. “There must be an end. If there is an account that you have been pursuing in the last 20 years, I think you should be able to draw a line. Going forward, we will want to focus on how we close those transactions.”

So far, AMCON has made over N1 trillion recoveries and resolved more than 5,000 relationship issues as well as salvaging several businesses from collapse.