Asset Management Corporation of Nigeria (AMCON): Capital Injections

In the early 2000s, the Nigerian banking sector underwent major structural reforms. In 2004, the Central Bank of Nigeria (CBN) announced a plan to strengthen the country’s fragmented financial sector through consolidation (Alford 2010). The CBN justified the policy with the need to “grow the banks and position them to play pivotal roles in driving development across the sectors of the economy” (Sanusi 2011). The CBN mandated that all banks increase their paid-up capital from ₦2 billion (US$13 million) to ₦25 billion (US$166 million).^FNThe exchange rate used throughout—₦150 for US$1—is the average exchange rate between 2009 and 2011, using annual data from the Federal Reserve Bank of St. Louis. The policy was announced just one month after Charles Soludo took office as the new governor of the CBN in June 2004. Banks had until December 2005, a period of roughly 18 months, to reach the new minimum required capital (Alford 2010). The announcement forced several mergers and acquisitions (M&A) in the banking sector. Of the 89 licensed privately owned banks active in Nigeria in 2005, 25 emerged. Ultimately, the CBN revoked the licenses of 13 banks due to their inability to reach the mandated capital level in time (Osuji 2012).

Following the consolidation, Nigerian banks fueled a rapid credit expansion to the private sector (Cerruti and Neyens 2016). Banks invested most of the funds in the country’s natural resources sector and in margin loans for the purchase of domestic stocks, making them increasingly exposed to oil and stock prices (Cerruti and Neyens 2016; Makanjuola 2016). The expansion of margin lending fueled a five-fold increase in the total capitalization of the Nigerian stock market between 2004 and 2007 (Osuji 2012; Makanjuola 2016). The domestic All-Share Index reached its high of 66,162 points on March 3, 2008, and then fell 70% in the following 12 months (Nigerian Stock Exchange 1996–2021). Oil prices tanked as the Global Financial Crisis (GFC) reduced demand around the globe. The combined oil and equity price shocks affected the balance sheets of many banks in Nigeria and led to a rapid increase in nonperforming loans (NPLs) to margin investors and oil companies (Cerruti and Neyens 2016).

Policymakers became aware of the magnitude of the problems facing the Nigerian financial sector through a special examination of the banking sector conducted jointly by the Nigeria Deposit Insurance Company (NDIC) and the CBN in June 2009 (CBN 2010a). The report, published on August 14, 2009, revealed 10 banks to be either undercapitalized or insolvent (Alford 2010; Cerruti and Neyens 2016). The report also highlighted the banks’ “excessive risk-taking and ineffective risk management, weak internal control mechanisms, undue focus on short-term gains, lack of Board and management capacity, conflicts of interest, and excessive executive compensation” (Makanjuola 2016). The conclusions of the examination made clear that several Nigerian banks needed to be recapitalized. The CBN intervened, quickly and decisively, following the outcome of the examination.

The conclusions resulted in an immediate capital injection totaling ₦420 billion into five banks—Oceanic Bank, Union Bank Nigeria, Afribank, FinBank, and Intercontinental Bank. These banks were identified as insolvent and “chronic borrowers at the Expanded Discount Window (EDW) of the CBN indicating that they had little cash on hand”^FNThe discount window (DW) is the Central Bank of Nigeria’s lending facility through which it provides lender-of-last-resort services to Nigerian financial institutions. The DW was expanded in 2008 to accept state bonds and commercial papers as collateral. (Alford 2010). Audits of the remaining five banks were completed by October 3, 2009 (Alford 2010).

Results of the audits are shown in Figure 1. The CBN said it would inject an additional ₦200 billion into Bank PHB, Springbank, Equitorial Trust Bank, and Wema Bank—increasing the number of intervened banks to nine (CBN 2009). The CBN subsequently lent ₦247 billion to the four banks (CBN 2010a). CBN removed the managing directors of eight of the nine banks that received injections—all but Wema Bank, which had just replaced its management in June 2009 (CBN 2009). A tenth bank, Unity Bank, was also determined to be insolvent but “had sufficient liquidity to meet its current obligations” and did thus not receive additional capital (Alford 2010). CBN ordered Wema Bank and Unity Bank to recapitalize by June 30, 2010 (CBN 2009). By the end of 2009, Equitorial Trust Bank had repaid its ₦30 billion debt but was still in need of a merger partner. At the end of 2009, CBN’s outstanding loans to the remaining eight banks stood at ₦637 billion (CBN 2010a).

The central bank wrote off these loans in full in 2009 and 2010 but retained them on its books (CBN 2010a). In 2011, the Asset Management Corporation of Nigeria (AMCON) took over those debts in the course of recapitalizing the banks (CBN 2012).

To ensure continued confidence in the banking sector, the central bank guaranteed all interbank lending transactions until December 2011 (Cerruti and Neyens 2016). In June 2011, CBN stated that, in order to keep their banking licenses, all intervened banks would be required to reach the mandated minimum capital adequacy ratio (CAR) of 10% by September 30, 2011 (Chew and Dijkman 2013).

The Nigerian authorities decided to establish a new agency to provide further support to the banking system. The government decided to establish a new entity because there was no rapidly available mechanism to inject more public funds into capital deficient banks, and legal challenges remained regarding the NDIC’s ability to wind up failed banks (Cerruti and Neyens 2016). The Asset Management Corporation of Nigeria Act was signed into law in July 2010 by the president, Goodluck Jonathan, officially establishing AMCON as Nigeria’s public asset management company (AMC). The act mandated AMCON to inject capital and purchase nonperforming and systemically important loans (Makanjuola 2016).

The AMCON Act stipulated rules on governance and transparency. Regarding governance, the statute required particular levels of experience and disallowed potential conflicts of interest. Measures for transparency in operations included the requirement to submit annual reports to the Ministry of Finance (MOF) and CBN and quarterly reports to the parliament, in addition to publishing annual reports. However, the act did not include financial safeguards that would limit the government’s exposure to potential losses, as AMCON’s only shareholder. “There [were] no provisions to limit the amount of assets or equity that AMCON [could] purchase or the bonds to be issued, no leverage ratio, and no requirement to maintain a minimum amount of equity” (Cerruti and Neyens 2016). AMCON was thinly capitalized with paid-in capital of ₦10 billion for asset acquisitions and recapitalizations totaling more than ₦4 trillion (Cerruti and Neyens 2016).

The CBN launched this recapitalization process for the intervened banks in December 2009, before AMCON had been begun to operate. The CBN’s strategy relied on third-party investors to acquire failing banks and ensure continued operations. AMCON’s role was to inject capital into intervened banks in the final stages of the M&A process to facilitate the deal once a failing bank had signed a transaction implementation agreement (TIA) with an interested acquirer (Makanjuola 2016). In practice, this was achieved through injections of zero-coupon bonds with discounted values sufficient to return banks’ net asset values (NAVs) to zero (Makanjuola 2016).

In addition to the bridge bank solution, the CBN considered three alternatives. Direct nationalization was thought to be difficult to implement, as it would have required additional legislation to be enacted. The CBN also opposed liquidation by the NDIC, motivated by concerns that it would negatively affect the recovering economy. A revocation of the banking licenses was opposed for the same reasons as it would have led to forced liquidation by the NDIC as well (Makanjuola 2016). The bridge bank option was thus deemed to be the most desirable.

The mergers and acquisitions process that the CBN launched in December 2009 followed a predetermined series of steps:

1. Confirmation of interest: Identification of interested investors;
2. Investor evaluation: Shortlisting of investors and execution of nondisclosure agreements;
3. Initial due diligence: Accountants’ reports and interaction with senior management;
4. Submission of nonbinding offers: Final shortlist of participants and submission of nonbinding offers;
5. Final offers: Detailed due diligence and reception of final offers;
6. Evaluate bids: Review and evaluation of final offers and follow-up discussion;
7. Discussion and recommendation of bids: Discussion of course of action and finalizing of decision on preferred investor;
8. Entering into exclusive negotiations: Exclusive negotiations with the preferred investor and finalization of a memorandum of understanding (MOU); and
9. Approval and AMCON capital injection: Signing of TIA and securing all necessary approvals, then AMCON capital injection (Makanjuola 2016).

The new management teams and boards of undercapitalized banks played an integral role in the process, supported by financial advisors. CBN and AMCON helped them find investors to ensure that all banks could recapitalize before the September 30, 2011, deadline (Makanjuola 2016). During the recapitalization process leading up to the deadline, all eight banks had negative equity and were kept as going concerns through the Tier II capital injected by the CBN in 2009 (CBN 2011c). Banks that were unable to make sufficient progress toward a deal became bridge banks, following a CBN meeting on June 13, 2011 (Makanjuola 2016). In the Nigerian context, a bridge bank is “a temporary full-service government-owned bank licensed by the CBN but otherwise fully operated by the NDIC” (Makanjuola 2016). The NDIC Act (2006, sec. 39) outlined the bridge bank resolution process.

Wema Bank, which the CBN had supported in the initial recapitalization in 2009, was able to avoid participating in the AMCON recapitalization. It recapitalized in 2010 with the help of a ₦20 billion asset sale to AMCON and a ₦7.5 billion capital raise from private investors. The CBN also waived ₦37 billion of Wema Bank’s original ₦87 billion loan; this appears to be the only instance in which CBN waived a bank’s debt. Unlike the other banks, Wema continued to owe CBN a portion of its original loan, totaling ₦50 billion, at the end of 2011 (CBN 2011b). Wema Bank subsequently applied for a regional banking license. Under CBN regulations, regional banks have lower capital requirements, which ensured Wema could continue operating without further support (CBN 2010b; CBN 2011a).

In total, eight Nigerian banks were involved in AMCON’s recapitalization process in 2011. Five banks were able to find acquirers and signed a TIA with their acquirers before the deadline (Makanjuola 2016). To facilitate the deal, AMCON injected capital into each institution to offset their negative equity—in other words, to adjust their net asset values to zero prior to acquisition (Makanjuola 2016).

Three other banks failed to make satisfactory progress toward a recapitalization deal before the deadline, and their banking licenses were revoked by the CBN. As a result, the three failed banks had their assets and liabilities transferred to newly created bridge banks. To ensure the new institutions were viable, AMCON provided a capital injection into each of the banks—becoming their full owner and only shareholder (Makanjuola 2016). Figure 2 provides a summary of AMCON’s capital injections into these eight intervened banks.

Further, it was decided that AMCON’s capital injection would occur only after the licenses of the failed banks had been revoked and new licenses for the bridge banks had been issued. This setup ensured that “AMCON would not [acquire] anything directly from [failing institutions . . .] and [was] thus not susceptible to any action at the instance of shareholders of the failing insured institutions” (Makanjuola 2016).

Overall, AMCON’s capital injections produced most of the agency’s reported losses from the early years of its operations (AMCON 2012). When AMCON’s public accounts were issued at the end of 2011, its first year of operations, the statements revealed a negative equity position of ₦2.36 trillion (AMCON 2012). AMCON’s recapitalization efforts and subsequent write-downs accounted for 88% of this total (AMCON 2012).

AMCON contributed a total of ₦1.47 trillion to bring the five intervened banks back to zero NAV (AMCON 2012). By the end of 2011, AMCON had to write down 91.06% of the investment, leaving it with ₦118 billion. Similarly, AMCON wrote down 88.49% of the equity it acquired in the three bridge banks. As of December 31, 2011, AMCON reported a combined NAV of ₦99 billion for the three banks. Its initial investment was ₦861 billion (AMCON 2012). Figure 3 provides a detailed breakdown of the various injections and write-downs.

Figure 3: Details of Write-Downs in Intervened and Bridge Banks
Source: AMCON 2012, 16.