Thursday, June 16, 2016 11:51PM / News & Investigations
Earlier today, Standard & Poors (S&P) lowered their global scale ratings on Skye Bank Plc to 'CCC+' from 'B-' and the national scale rating to 'ngB+' from 'ngBB' and placed both on the CreditWatch with negative implications. Primarily, S&P took this decision based on the likely reduction in the bank’s capital adequacy levels and increased non-performing loans, factors which S&P opines makes the bank particularly sensitive to the worsening Nigerian economic conditions (a general environmental condition affecting all entities and sectors).
1. The unintended consequence of the banks’ inability to release its Q4’15 and Q1’16 financial results as at when due;
2. The likelihood of the company declaring a loss in its awaited results long after the grace period (which for all intent and purposes was unavoidably for CBN to resolve:
3. The absence of an advisory on the developments behind the scene (which we understand to have been in deference to the CBN) ; and
4. The inconclusiveness of the plans of the directors of the bank to raise additional capital to the tune of N80bn, now imagined to be nearer a decision.
In the course of our Q1 and Q2 review and validation of the compliance X protocol of the NSE; we recall that the bank had earlier issued a profit warning, advising the market that its earnings and profitability would be significantly depressed by reason of increased provisions for some non performing loans in the upstream oil and gas, telecoms, and real estate sectors.
The bank equally represented that it had taken the decision to increase its provisions given current and medium-term macro-economic realities that had negatively impacted some key sectors of focus.
Recall that the bank had recently acquired Mainstreet Bank at the cost of N126bn to strengthen its new focus on retail and commercial business, a transaction financed from its balance sheet and approved by the CBN ( adeal which in view of the anticipated/possible depreciation meant a foreign borrowing for the acquisition was unadvisable/untenable at the time, and perhaps more so now. Needless, to say, like all banks in the system, it has had to deal with the consequence of the significant shift created by the Treasury Single Account (TSA) implementation.
Enquiries on why this possibility impacted the bank significantly revealed that while the Skyebank had anticipated that these would negatively impact its capital adequacy position and had commenced a capital raising initiative to shore up its capital adequacy requirement and also support its business need, given its increased size following the consolidation of the acquired entity; it could not have imagined the set-back it suffered on account of Nigeria’s weak macro–economic conditions and more importantly the uncertainty surrounding the nation’s foreign exchange policy.
Banking Sector, Clamour for Free float/Devaluation and Asset Quality
As with Skyebank Plc, banks such as FCMB and Stanbic IBTC equally had to call off their capital raising plans in response to the unfolding unfavourable capital market conditions. Projections thus became tied to the national economic direction, something S&P was spot on about.
That said, and based on our recent interactions with the bank’s management and board, the representation that it is currently in discussion with two international banking groups that are looking at leveraging on Skyebank’s platform(s) to make an entry into the Nigerian banking sector would appear to have some credibility. From evidence provided, each of these institutions is keen to inject significant equity capital into the bank subject to positive/favourable changes in the monetary policies of the country; which only materialised this week.
Some of the existing key shareholders, it is understood, have also indicated an appetite for the additional capital requirement needed by the bank. We must note that we do not expect these processes to be completed / concluded within the next six months, subject to regulatory approvals and perhaps, a sustenance of the current change from a controlled market outlook.
In recognition of the impact of the persistent harsh economic reality on its loan portfolio however, the steps taken in 2015 to increase the level of provisions in its books, must now be seen as bold even though this was questioned at the time.
Many of these loans were booked to finance upstream oil and gas assets; assets which have now been negatively impacted by the crash in the price of crude oil, amidst other headwinds that are unique to the Nigerian state. This remains an industry challenge, something not peculiar to Skyebank, even as we seek information on their level of exposure relative to other banks.
Instructively, all banks have been advised by the central bank to restructure such facilities in line with the realistic cash flow, given that the proven reserves in the assets are sufficient to repay the facilities. This point remains a matter for which an agreement on its proper accounting treatment does not seem to have been resolved and if so, we are not privy to. We believe the accepted process for treating this class of asset and model of valuation will have far reaching consequences on banks in Nigeria; especially those with a more than reasonable exposure to the sector
Talking Real Estates – Taking a Pause
Unique to the bank was its real estate assets portfolio, an attraction in itself for which given the downturn, the Timothy Oguntayo led-bank had to take what appears now to be proactive steps to make provisions; primarily on account of a decommissioned economy characterised by a lull in economic activities and a slow-down in commercial activities in that sector; even as the underlying assets retains value, albeit for a future period.
Whilst these increased provisions would indicate a sound and prudent response to the macro-economic headwinds envisaged, the issue of NPL’s remain a source of interest and concern to stakeholders and investors alike.
For one, an answer beyond the bank’s management representation about aggressive loan recovery efforts and prevention of further deterioration of assets can only be validated with the publishing of its financial accounts. This is one reason why the CBN and the bank must see the point in the S&P report – this problem is not unique to you but your financial reports (apart from Stanbic IBTC – a FRCN explained issue) must be put to bed.
The concerns about a limited upside to the financial condition of Nigerian banks with relative risk/exposure profiles to the economic, fiscal and monetary policy direction of government will be sustained until the issues are resolved and plans for coping with the economic conditions in Nigeria presented to the market.
Skyebank is confident that the current challenges in the Nigerian economy, though it affects many businesses and endeavours, are temporary, as the levers of the economy are being re-calibrated to boost the economy in the medium to long term.
We recall that at a public stakeholder meeting in Q4 2015, the bank announced its shift in focus from wholesale and institutional banking to retail and commercial banking. It reported then that it had partnered with the firm of Mckinsey & Co to develop a three- year strategic plan with retail, SME and commercial banking as its core. This execution of this plan becomes more pertinent now than ever envisaged, and remains one of those signs to watch out for.
Our sense at this point is that given the seismic changes impacting the economy and how business is ordered, we envisage a scenario where in less than 3-5 years, six (6) banks or less will dominate about 70% of the market while the remainder will scramble for the rest of the market share.
Those who are able to use current challenges to recalibrate their missions during this crucial period stand a good chance to refocus operations and reverse the narratives.
Suffice to say therefore, we expect Skyebank and indeed the CBN will see the need to act decisively to accelerate the resolution of this matter to enable the market / investors be properly guided.