AMCON assets, time bomb –Afrinvest

…Warns of impending toxic assets buildup in power sector funding

 Afrinvest (West Africa) Ltd has raised the alarm that the acquisition of Asset Management Corporation of Nigeria’s debt by the Central Bank of Nigeria (CBN) may threaten banking industry in case of another crisis.The Managing Director/CEO of the investment-banking firm, Ike Chioke, who disclosed this at its official launch of the 2014 Nigerian Banking Report, stated that over 40 per cent of CBN’s asset portfolio is unmarketable, comprising principally AMCON bonds, intervention funds and development finance loans.

He explained that these are long term investments without a discernible exit time frame other than the eventual performance of the loan portfolio.

According to him, the 190.5 per cent surge in other liabilities from N2.1 trillion in December 2009 to N6.1 trillion in November 2013, traceable to the acquisition of AMCON’s debt by the CBN, is alarming.

He affirmed: “In the event of another crisis in the banking space, the CBN may not have the capacity to bail out the banks without avoiding the option of printing money, which will have significant consequences on price stability.”

On the adverse impact to the banking sector, Chioke explained that with the development, the apex bank might be forced to raise the AMCON levy on banks from the current 0.5 per cent of total assets plus 0.5 per cent of 33 per cent of off-balance sheet items in the coming years.

He stated: “This will exert further pressure on industry bottom lines as AMCON’s fee as a proportion of total OPEX has risen from 4.6 per cent in FY:2012 to 7.6 per cent in FY:2013 and is expected to cross the 10.0per cent threshold in FY:2014.”

Meanwhile, the investment analyst has also warned that banks’ funding of power sector may create emergence of another era of bubble assets as significant portion of the funding for the acquisition of these assets by private sector investors was provided by Nigerian banks with minimal equity contributions. The investment, which has absorbed enormous level of funds from banks, according to him, is yet to yield returns and has in part led to the rush for Eurobonds by banks in 2014 in an attempt to restructure credit to the power sector.

He noted that major apprehension was the currency mismatch as cash flows from power assets are generated in naira.

“More worrisome, however, is that many of the Gencos and Discos earn significantly less than their projected cash flows prior to acquisition due to government’s inability to resolve tariff and gas supply challenges. Cumulatively, the apex bank should keep a close watch on banks’ risk assets to the power space to avoid the emergence of another era of toxic assets,” Chioke warned.

Meanwhile, Chioke warned that the highly applauded power sector privatisation programme of the Federal Government in 2013 might begin to reveal structural and financial challenges in the near term if not well managed.

Chioke stressed the need to shore-up external reserves to avoid shocks in the system originating from capital reversals, which could have huge adverse effects on the economy. He restated the need for CBN to implement better administrative measures to support the stability of the currency.

“The external reserves has recently retreated from its waning state, rising from a low of $36.7 billion in June 2014 to $39.7 billion as at September 4, 2014. This mild increase was associated with global supply disruptions pushing oil prices higher. However, foreign portfolio investors constitute an estimated 38 per cent ($15 billion) of the reserves.

“This implies that shocks in the system originating from capital reversals can have huge adverse effects on the economy. In addition, high oil prices and rising oil production have not entirely translated into strong currency reserves, as the CBN consistently expends the reserves (i.e. primary liquid assets) in managing currency volatility.

“Therefore, the balance of $24.4 billion in the external reserve is ideally the sum attributable to oil receipts. Based on the $13.2 billion import estimates in Q1 2014, the reserves can barely cover about five-six months of imports, which is lower than the official seven-eight months cover,” he stated.

Source : SunOnline

Tags: No tags

Comments are closed.