PURCHASE ASSUMPTION TRANSACTIONS THE NIGERIAN EXPERIENCE Adeleke

PURCHASE & ASSUMPTION TRANSACTIONS “THE NIGERIAN EXPERIENCE” Adeleke A. A. Director, Asset Management Department, NDIC. 5/12/2011 P&A Transactions: The Nigerian Experience. 1

OUTLINE P&A - Explained Why P&A? P&A – The Nigerian Experience Challenges Faced Wrap up – Experience Sharing 5/12/2011 P&A Transactions: The Nigerian Experience. 2

P&A - Explained Ø Healthy bank purchase assets and assume deposit liabilities of the failed bank, similar to M&A Ø A failed bank could be split to make it attractive to banks that wish to enhance market penetration or establish new branches where the failed bank had branches Ø Acquirer(s) chosen on the basis of highest premium offered during bidding Ø Deposit insurer or government would put cash/securities for the difference. Such could be recovered from bad assets of the failed bank 5/12/2011 P&A Transactions: The Nigerian Experience. 3

P&A - Explained (i) Merits ü Depositors are protected ü Continuity in rendering services thereby sustaining public confidence in the banking system ü Other creditors might not be paid thus providing some form of market discipline ü Avoids disruption to depositors, borrowers and payment system ü Shareholders wiped out and inefficient bank closed 5/12/2011 P&A Transactions: The Nigerian Experience. 4

P&A - Explained (ii) Demerits Large and uninsured depositors protected, thus eroding market discipline It could be costly especially if fund from Central Bank/government/deposit insurer to fill gap between total deposits and assets purchased is significant 5/12/2011 P&A Transactions: The Nigerian Experience. 5

Why P&A? Choice Of P&A was based on following Public Policy considerations: Ø Giving depositors easy access to their funds without conditions Ø Facilitating continuity of banking services in the same business premises utilized by the failed banks before they went under Ø Encouraging depositors to establish bankercustomer relationship with the acquiring banks Ø Promoting banking culture which is critical to savings mobilization for economic development 5/12/2011 P&A Transactions: The Nigerian Experience. 6

P&A – The Nigerian Experience Ø P&A concluded for 11 closed banks for which winding-up orders have been obtained Ø Application for Winding-up orders for 2 banks still pending in court Ø N 73. 42 billion in private sector deposit liabilities of 11 banks resolved out of the N 84 billion private deposit liabilities of 13 banks i. e 84% of total Ø Assuming banks took Private Sector deposits and acquired only the physical assets avoiding the loans except for 1 bank 5/12/2011 P&A Transactions: The Nigerian Experience. 7

P&A – The Nigerian Experience Ø CBN issues Promissory Notes in tranches for the deficit between the private sector deposits assumed and the assets acquired Ø NDIC pays the insured deposits to assuming banks in tranches Ø NDIC saddled with the recovery of loans not acquired Ø Public Sector depositors to receive only their insured deposits in the first instance. Further payment depends on recoverability of the loans 5/12/2011 P&A Transactions: The Nigerian Experience. 8

Challenges Faced o Legal Impediment Ø Winding-up Order obtained for 11 out of 13 banks. 2 applications still pending Ø The 2 banks are contesting the Order in court Ø Managing Agents in charge of banks for which applications for winding-up orders are still pending Ø NDIC cannot arrange for P&A for banks for which winding-up orders have not been obtained or being contested in court 5/12/2011 P&A Transactions: The Nigerian Experience. 9

Challenges Faced o Depositors’ Protection Ø Arrangement allow full payment to private sector depositors while public depositors receive only insured deposits in the first instance Ø Payment to public depositors will depend on the recoverability of the outstanding loans o Recovery of Bad Loans Ø Assuming banks purchased only physical assets refusing to buy the loan assets Ø NDIC as Liquidator is saddled with the recovery of mostly bad loans 5/12/2011 P&A Transactions: The Nigerian Experience. 10

Challenges Faced o Escalation in Bank Closing and Related Costs Ø Delay in obtaining winding-up order and challenge to those already obtained has led to increase in bank closing and related costs such as; § Salaries of Managing Agents, bank and auxiliary staff § Rent for over-stay period in leasehold premises 5/12/2011 P&A Transactions: The Nigerian Experience. 11

Challenges Faced § Evacuation and warehousing costs in respect of bank chattels moved from premises with expired leases. § Legal expenses on defensive matters instituted by landlords, depositors and other claimants 5/12/2011 P&A Transactions: The Nigerian Experience. 12

Wrap Up Let’s Share Your Experience! 5/12/2011 P&A Transactions: The Nigerian Experience. 13