Nigeria Content Online

The first stage of the operations of the Asset Management
Company (AMCON) would address most of the troublesome loans in the industry,
Mustafa Chike-Obi, the managing director of AMCON, expressed this optimism in
an interview last week.

The AMCON chief also said shareholders of the rescued banks will
never be forced to sell their shares during the recapitalisation process.

“We think that when we have done the first stage, we would have
addressed 80-90 percent of all the troublesome loans in the country,” he said.

“We are taking non performing loans in stages – Phase 1 we
estimate to be about N2.2 trillion face value and roughly 600 billion in actual
cash. The Act specifies what assets are eligible for purchase by AMCON, so it
is determined absolutely by the Central Bank’s guidelines, and the guidelines
in this case are non performing loans – all non performing margin loans for all
banks and all non performing loans for rescued banks.

“In the first phase, first of all, everything has to be
non-performing loans. It is a category. Another category is all margin loans
across all banks and then all other non-performing loans from the rescued
banks. That is the first stage. We anticipate that there may be other loans
that may be troublesome down the road, which we would address later,” Mr.
Ckike-Obi said.

He also assured shareholders of the troubled banks that they
have the freedom to decide how and when to sell their shares.

“They may sell their shares on the market, if they think the
market is high enough; or they can stay and be partners with AMCON in the new
recapitalised banks, but they will never be forced to sell their shares and
nobody will force them out,” he said.

Freedom to sell

Mr. Chike-Obi said major conflicts between the banks and
shareholders are not really anticipated. According to him, the NDIC is the only
option left for any bank in an irresolvable conflict with its shareholders.

“Our view is pretty clear. What we (AMCON) would do is that we
will buy the non performing loans and we will offer to recapitalise the rescued
banks. Negotiations between the banks and the shareholders, we expect, between
those two,” he said.

“If the existing shareholders don’t agree to a merger, the only
option left for them is to go to the NDIC where they would lose everything, so
we don’t expect much… This is a win- win for everybody. The existing
shareholders get something, the new shareholders get something. Most of these
rescued banks have interested buyers’ interested merger partners, most of them
do. There has been a lot of work done with them and we know who they are, both
local and international,” Mr. Chike-Obi further said.

Afrinvest, an investment and research firm, said the AMCON
intervention should be good for the economy.

“AMCON has offered to purchase an estimated N2.2tn (US$15.0bn)
in bad loans in exchange for 7-year bonds guaranteed by the Federal Government
of Nigeria. This should help plug the negative equity of the rescued banks, as
well as get banks lending again.

“Another crucial point in our view remains the relatively small
window within which banks are expected to deal on these terms. The AMCON has
said that it expects all transactions involving the purchase of NPLs from banks
to settle on or before December 31, 2010. This may prove to be impracticable
for a number of reasons, including the length of time required to carry out
necessary due-diligence on the relevant assets, as well as the impact the
existing market conditions surrounding bond pricing will have on funding for
AMCON,” Afrinvest said.

AMCON was set up as a resolution trust vehicle, following the
Central Bank induced reforms in 2009, which led to the sack of the chief
executives of all eight banks, as well as the injection of N620.0bn (US$4.0bn)
into these institutions. The audits revealed severe impairment to asset quality
across the sector, a display of grave corporate governance abuses amid serious
liquidity squeeze in several banks.

Available economic
indices, ahead of this year’s last meeting of the Central Bank of
Nigeria’s rate-setting committee (the Monetary Policy Committee – MPC),
were not exactly pretty. Both government debt and the fiscal deficit as a
share of GDP were up and growing. Moreover, government had become the
biggest borrower in the economy, and there were signs that its
activities in the market for fixed income securities had begun to
constrict the private sector’s borrowing space.

Inflation remained a
key worry and is likely to worsen, as we head into the harmattan
season. Two things are in play with projected inflation: first,
agriculture is the main driver of domestic prices (according to our
official bean counters), and it is largely rain-fed and subsistence. So,
the dry season would cut into agric production, driving prices up.

A second price also
caused concern, as the MPC’s worthies headed for their meeting tables:
the naira’s exchange rate. Whatever the main drivers of demand are in
the foreign exchange markets (speculation, or front-loading by importers
concerned to secure supplies ahead of a potentially disruptive election
cycle), the rate at which the Central Bank was drawing down on the
external reserves to keep the official foreign exchange market supplied
is not sustainable.

In this
circumstance, what was the MPC expected to do? Tighten monetary
conditions by raising rates. There were two problems with this option.
The first was to decide which is the most important of the policy tools
available to the MPC: the policy rate or the standing facilities’
corridor.

Secondly, could
liquidity conditions in the economy support a rate increase? Or put
differently, are the banks healthy enough to help transmit any rate
movement to the economy? Remember that the CBN has had to maintain its
guarantee on interbank transactions to keep the market ticking.

Still, the biggest
unknown in predicting the MPC’s response was always political. Could the
CBN find the nerve to move rates up when its political paymasters would
rather not? A great part of the apex bank’s dilemma over the years has
been the economic nous (or lack thereof) of the managers of the fiscal
side of the economy.

The Obasanjo
administration long argued, for instance, that the main burden on the
real sector was its lack of access to bank lending. It then focused its
best efforts on holding interest rates down, while its revenue and
spending activities fed rampant increases in domestic prices. True, we
cannot forget that the CBN has both statutory and operational autonomy.
But we must also remember that it does not have as good enough a handle
on the monetary transmission mechanism as it needs to argue its corner
with the political authorities.

In the end, the CBN
performed a veritable conjurer’s trick! According to all the
post-meeting media reports, the CBN’s rate-setting committee left
interest rates unchanged. The MPC did vote to hold the monetary policy
rate (MPR) at 6.25%. But it also adjusted the corridor around the MPR to
+/- 200 basis points, “implying Standing Lending Facility (SLF) rate of
8.25%, and Standing Deposit Facility (SDF) rate of 4.25%”. The denizens
of Aso Rock may have slept better Tuesday night, persuaded that Mallam
Sanusi Lamido Sanusi was not minded to rock the economic boat faster
(and/or more violently) than the political lullabies that the country is
being asked to go to bed on.

But did nothing
really happen? Look closely at the details. Even the media reports have
cat-type phalanges poking out of the bag several paragraphs down. Every
bank treasurer that I have spoken with on this issue since Tuesday
anticipates a rise in retail rates on the back of the apex bank’s
decision to increase its standing deposit facility by 1%. What this does
is push up the opportunity cost of interbank lending. Apparently,
therefore, the key to understanding the CBN’s policy response is the
movement in the standing facilities corridor around the policy rate.

Does this then mean
that the MPR no longer matters? Or has the monetary authority given up
on the attempt to tie the policy rate to market rates? Most
commentators would argue that as a lever on the economy, the policy rate
never really mattered. Expect further tightening ahead. But do not
expect the incidence to fall on the policy rate.

The stock market opened the week on a rather bearish note that
almost threw the market off its balance. The timely bull’s response on the
fourth trading day of the week was a welcome development, as it re-affirms the
market normality. Inspite of the bull’s weak response, it successfully clears investors’
mind on reasons behind ASI drop. Although equities, especially those in the
banking sectors, became attractive and turned on complete bid, the Nigerian
Stock Exchange All Share Index (NSE ASI) is yet to recover from the bear’s
knife, as it closed low at 2.27% or 572.57 points off its opening figure, and
now stands at 24,611.56. Market capitalization of the listed equities now
stands at N7.859 trillion.

The banking stocks dominated market performance, as investors
exchanged a total of 1.11 billion units of its equities’ shares through the
week. The said volume were chiefly enhanced by volume in the shares of Zenith
Bank, that traded 185.23 million units of shares in 1,757 transactions.
Guaranty Trust Assurance, AIICO, and Law Union & Rock boosted performance
in the Insurance sector with over 47 million units of shares. Mortgage,
Information & Communication and Food/Beverages sub-sectors followed in that
order.

The 30 stocks that gained were led by Vono Products that was
moved by market forces. The stock moved up by 14.15% from N1.06 to N1.21.
University Press, Eternal Oil, and Fidelity Bank followed on gainers’ line in
that order. Meanwhile, the 61 decliners were led by Livestock, Oceanic Bank,
International Breweries, and Wema Bank that shed 16.05%, 13.95%, 13.64% and
13.33% respectively. A total of 112 stocks closed the week on a flat note.

Corporate actions for the week ended

Prestige Assurance Plc

The indemnity firm, Prestige Assurance Plc, made available its
interim Q3 unaudited results to the market. It was for the period ended
September 30, 2010. Operation wise, the firm performance was up within the
period. Driven by fairly improved claims settlement, gross premium went up by
15.81% from N2.73 billion in comparable period Q3 ‘09 to N3.16 billion.

Similarly, PAT was up by 22.09% at N573.06 million, against
N469.38 million in Q3 ‘09. Shareholders’ fund grew marginally by 9% at N4.75
billion.

Further analysis shows that Q3 EPS stands at 27 kobo, 23% growth
over 22 kobo returned in Q3 ‘09. At current market price, PE multiple of 8.15
was generated and presents Prestige attractive for medium-long term investment.
Its earning yield currently stands at 11.85%, while net profit margin of 18.15%
is slightly higher than 17.71% posted in Q3 ‘09. Returns on stakeholders’
investment on every N1.00 within the period was 12% higher than 11% in
comparable period.

Observation

Liquidity is a major challenge on the price movement of
Prestige. Possibility of dividend payment in the upcoming financial year ending
Q4 ‘10 is high here.

Eterna Oil & Gas Plc

The oil marketing, servicing, and distribution company, Eterna
Oil & Gas Plc, equally reported its Q3 unaudited results for the period
ended September 30, 2010 to the market last week. The scorecards showed
improved growth over similar period in 2009. A turnover of N11.16 billion was
posted against N6.76 billion in 2009, representing a growth of 65%. The growth
here was boosted by increase sales in fuel and gas products.

At reported profit after tax of N641.57 million, a growth of
202% was recorded against loss after tax of N627.05 million in similar period
2009. Further analysis shows that Q3 EPS now stands at 49 kobo, resulting in PE
ratio of 10.64 at current market price of N5.21. Return on capital employed
within the period was 15% on every N1.00, while profit margin stood at 5.75%.

Observation

At current ratios growth rate, Eterna Oil looks attractive for
medium-long term investment.

Report on the OTC market
for FGN Bonds

Available data from OTC FGN bonds market shows that a total
volume of 210.84 million units valued at N174.22 billion in 1,445 deals was
recorded this week, in contrast to a total of 88.7 million units worth N74.68
billion exchanged in 700 deals during the week ended Thursday, November 17,
2010.

As in the preceded week, the most active bond (measured by turnover volume)
was the 10.00% FGN July 2030 (7th FGN Bond 2030 Series 3), with a traded volume
of 78.4 million units valued at N59.51 billion in 561 deals. It was immediately
followed by 4.00% FGN April 2015 (7th FGN Bond 2015 Series 2), with a traded
volume of 58.3 million units worth N44.04 billion in 446 deals. Seventeen (17)
of the available thirty-five (35) FGN Bonds were traded during the week,
compared with nine (9) in the in the preceding week.