PURCHASE & ASSUMPTION TRANSACTIONS “THE NIGERIAN EXPERIENCE” Adeleke A. A. Director, Asset Management Department, NDIC. P&A Transactions: The Nigerian Experience. 15/12/2011

OUTLINE P&A - Explained Why P&A? P&A – The Nigerian Experience Challenges Faced Wrap up – Experience Sharing P&A Transactions: The Nigerian Experience. 25/12/2011

P&A - Explained  Healthy bank purchase assets and assume deposit liabilities of the failed bank, similar to M&A  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  Acquirer(s) chosen on the basis of highest premium offered during bidding  Deposit insurer or government would put cash/securities for the difference. Such could be recovered from bad assets of the failed bank P&A Transactions: The Nigerian Experience. 35/12/2011

P&A - Explained (i)Merits Depositors are protected Continuity in rendering services thereby sustaining public confidence in the banking system Other creditors might not be paid thus providing some form of market discipline Avoids disruption to depositors, borrowers and payment system Shareholders wiped out and inefficient bank closed P&A Transactions: The Nigerian Experience. 45/12/2011

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 P&A Transactions: The Nigerian Experience. 55/12/2011

Why P&A? Choice Of P&A was based on following Public Policy considerations:  Giving depositors easy access to their funds without conditions  Facilitating continuity of banking services in the same business premises utilized by the failed banks before they went under  Encouraging depositors to establish banker- customer relationship with the acquiring banks  Promoting banking culture which is critical to savings mobilization for economic development P&A Transactions: The Nigerian Experience. 65/12/2011

P&A – The Nigerian Experience  P&A concluded for 11 closed banks for which winding-up orders have been obtained  Application for Winding-up orders for 2 banks still pending in court  N73.42 billion in private sector deposit liabilities of 11 banks resolved out of the N84 billion private deposit liabilities of 13 banks i.e 84% of total  Assuming banks took Private Sector deposits and acquired only the physical assets avoiding the loans except for 1 bank P&A Transactions: The Nigerian Experience. 75/12/2011

P&A – The Nigerian Experience  CBN issues Promissory Notes in tranches for the deficit between the private sector deposits assumed and the assets acquired  NDIC pays the insured deposits to assuming banks in tranches  NDIC saddled with the recovery of loans not acquired  Public Sector depositors to receive only their insured deposits in the first instance. Further payment depends on recoverability of the loans P&A Transactions: The Nigerian Experience. 85/12/2011

Challenges Faced  Legal Impediment  Winding-up Order obtained for 11 out of 13 banks. 2 applications still pending  The 2 banks are contesting the Order in court  Managing Agents in charge of banks for which applications for winding-up orders are still pending  NDIC cannot arrange for P&A for banks for which winding-up orders have not been obtained or being contested in court P&A Transactions: The Nigerian Experience. 95/12/2011

Challenges Faced  Depositors’ Protection  Arrangement allow full payment to private sector depositors while public depositors receive only insured deposits in the first instance  Payment to public depositors will depend on the recoverability of the outstanding loans  Recovery of Bad Loans  Assuming banks purchased only physical assets refusing to buy the loan assets  NDIC as Liquidator is saddled with the recovery of mostly bad loans P&A Transactions: The Nigerian Experience. 105/12/2011

Challenges Faced  Escalation in Bank Closing and Related Costs  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 P&A Transactions: The Nigerian Experience. 115/12/2011

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 P&A Transactions: The Nigerian Experience. 125/12/2011

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