| Regulators |    13617 VIEWS  |
| Regulators | |
| 13617 VIEWS | |
 |
Tuesday, September 25, 2018 12:15PM / By Yinka
Ogunnubi
"You only find out who is swimming naked when the tide goes
out." -
Warren Buffet
To understand what happened on the 21st of September 2018, you need to go back to the very beginning. For the purpose of this article, I will like to categorize it under three headings.
With the help of timelines and publically available data, I will try to answer the following questions.
Questions 1 and 2 will be answered implicitly
within the thread. So you will need to follow the arguments carefully and maybe
read between the lines. Questions 3 and 4 will however be answered directly. It
is important to note that the resource for this thread came from publicly
available materials online from the CBN, NSE and other resource centers like Proshare
and Nairametrics.
It is remarkable that the evidence had been
right there before our eyes for many years but we failed to pay attention and
ask the right question. Hopefully with what we will read in this piece, we will
begin to ask those very important questions.
BEFORE THE ACQUISITION OF MAINSTREET BANK
2005
Skye bank was the product of the merger of 5
banks namely; Prudent Bank, EIB, Bond Bank, Reliance Bank and Cooperative Bank.
By November of 2005, it was listed on the NSE.
2009
In August of 2009, the CBN recapitalized 5
banks (namely Afribank, FinBank, Intercontinental Bank, Oceanic Bank and Union
Bank) to the tune of N400 Billion on the back of poor corporate governance and
huge non-performing loans (NPL) said to be over 40%. The percentage of NPL to
total loans ranged from 19% - 48% and all 5 banks were said to be below the
minimum capital adequacy ratio of 10%.
2011
After
the failed attempt of recapitalising Afribank, the CBN announced its
nationalization in June of 2011 and handed it over to the Asset Management Corporation
of Nigeria (AMCON) to manage through a capital injection program. Afribank was
renamed MainStreet Bank otherwise known as a “Bridge Bank”. A bridge bank is a bank created by a
central bank to operate a failed bank until a buyer can be found for its
operations. Thus through an aggressive debt management program, AMCON
was the vehicle used to grow MainStreet Bank (formerly Afribank) back to
financial stability.
2014
In February 2014, AMCON announced that it was
going to sell 100% if it’s stake in Mainstreet bank by October. After the
bidding rounds, Skyebank emerged the preferred bidder with a bid of N126
Billion. It immediately paid the initial deposit of 20% (N26 Billion) and on
October 31, paid the balance of N100 Billion ahead of the November 3 deadline
to acquire MainStreet Bank.
In September 2014, SkyeBank emerged as one of
the eight Systematically Important Banks (SIB) in Nigeria. SIBs are "financial
institutions whose distress or disorderly failure, because of their size,
complexity and systemic interconnectedness, would cause significant disruption
to the wider financial system and economic activity”. In other words, they are
“too big to fail”.
The
question has often been asked. Why did Skye Bank acquire MainStreet bank?
According to the bank, it did so to “achieve an inorganic growth and address
structural concerns affecting the bank in its preferred area of commercial
banking business”. It particularly noted that it was attracted by the low NPL
ratio of 4.3% (lower than the regulatory ratio of 5%) and the brand loyalty and
branch network of the bank in the SS and SE parts of Nigeria.
However,
even in 2014, there were warning signs. One obvious one was the rapidly
reducing capital adequacy ratio of the bank. An issue that was even acknowledged
by the Apex body itself. However strong these concerns were, it didn’t stop the
CBN from giving its “no objection” to the acquisition.
Let
me pause here to say a little about the Capital Adequacy ratio (CAR). Capital Adequacy Ratio (CAR) is basically
the proportion of the bank’s tier 1 and tier 2 equity (Qualifying capital or
Equity) as a proportion of its risk weighted assets (loans). It is the
proportion of a bank’s own equity in relation to its risk exposure. The
CBN in its wisdom set the CAR for domestic banks at 10% while regional and
international banks was set at 15%. For SIBs, the CAR was put at 15% + an
additional capital surcharge of 1% making it 16%. At the time of acquisition of
MainStreet bank, the CAR of SkyeBank was 11% (from 20% in Dec 2013), just 1%
higher than minimum requirement and obviously lower than their ranking as a
SIB. By the time of integration of Skye Bank with Mainstreet bank in June 2015,
their CAR had fallen to 7.7% way below the regulatory standard. Curiously, this
red flag did not stop the regulator from approving the deal.
DURING
THE ACQUISITION
2014
At
the time of bidding, the net asset of MBL was N69 Billion (N67 Billion at FYE).
Skye bank however, bided N126 Billion for it. This shows that the purchase
consideration paid by Skye Bank was well above the net asset of MBL by about
N59 billion. This raised a lot of eyebrows because at the said time, market
capitalization for Skye Bank was less than N40 Billion while its Capital (Tier
1 + Tier 2) was clearly not sufficient to support the bid. Going by its
financials as at Dec 2013, Skye Bank only had a
maximum headroom of c.N26bn of its Tier 1 Capital to fund the acquisition.
Meaning it needed to raise additional N100 Billion to be able to buy MBL. (This
was on the assumption that as a SIB, it will need to maintain CAR of at least
15%). This didn't seem to bother the professional advisers engaged by AMCON as
they approved Skye Bank as
the preferred bidder. In a way, you cannot blame them. Their job was to find
a bidder. It was the job of the CBN to approve.
In Oct 2014, the CBN wrote a letter to Skye Bank
communicating its “No Objection” to its selection as the Preferred Bidder for
MBL. In the letter, the CBN reiterated that the fresh funds should not be
borrowed from the banking system in line with existing regulation prohibiting
borrowing from the banking system to recapitalize banks. The letter also
acknowledged the poor capital adequacy level of the bank.
* CBN letter
Reference: Skye Bank Plc: One Year After CBN Takeover - Proshare – Aug 07, 2017
Let
me digress again to talk about the Tier 1 and Tier 2 Capital. Tier 1 Capital is
basically made up of your share capital, premium and reserves while Tier 2 is
made up of other qualifying capital like debt. The assumption typically is that
should you use your capital for acquisition, you must not run afoul of the CAR
otherwise the regulator will not approve. In the case of Skye Bank, their
Capital could only pay for the 20% deposit for the purchase while the options
they had, to pay the balance N100 Billion was either to raise addition equity
or debt. But either option had challenges. If they decided to go the route of
raising Equity, they would inevitably face time constraints in processing the
necessary approvals from shareholders, CBN, SEC and NSE. A cost that might take
them at least three months. Which will prevent them from meeting the deadline
to pay the balance in early November. If they decide to raise debt, (Tier 2
capital) there was the regulatory constraint that caps tier 2 capital at a
maximum of 33% of tier 1 capital.
Reference: Skye Bank Plc: One Year After CBN
Takeover - Proshare – Aug 07, 2017
What
Skye bank did to fund the
transaction, was to first institute a N30 billion Commercial Paper program to
pay the deposit for the transaction. It then obtained a bridge financing of
N100 billion from four banks. The bridge financing was backed using Mainstreet
Bank’s AMCON Bonds that were due for redemption shortly after the closing of
the transaction.
This is where it
gets interesting. According to Section 159
(1) & (2), of CAMA:
159. (1)
In this section, financial assistance includes a gift, guarantee, security or
indemnity, loan, any form of credit and any financial assistance given by a
company, the net assets of which are thereby reduced to a material extent or
which has no net assets.
(2) Subject to the
provisions of this section -
(a)where a person is acquiring or is proposing to acquire shares
in a company, it shall not be lawful for the company or any of its subsidiaries
to give financial assistance directly or indirectly for the purpose of that
acquisition before or at the same time as the acquisition takes place; and
(b) where a person has acquired shares in a company and any
liability has been incurred (by that or any other person), for the purpose of
this acquisition, it shall not be lawful for the company or any of its
subsidiaries to give financial assistance directly or indirectly for the
purpose of reducing or discharging the liability so incurred.
In
layman’s language, it simple means that it is unlawful to use the assets of a
company to buy its own shares. This was exactly what Skye Bank did. Skye Bank borrowed money from 4 banks, used the money to pays AMCON for
the N100 Billion balance for the MBL acquisition, AMCON then redeems MBL AMCON
Bonds and Skye Bank (who now owns MBL) takes the cash to pay the four banks
back. Put in another way, MainStreet Bank was acquired by its own money. This happened with the full blessing of the CBN.
In
summary, it would appear that the presence of a weak
capital adequacy ratio, and poor profitability ratio of the bank was not enough
to pull the plug on the deal. It certainly did not stop the SEC and the CBN in
December 2014 from issuing a letter ratifying the sale and acquisition of
Mainstreet Bank from AMCON.
CBN and SEC letter ratifying the sales
Reference: Skye Bank Plc: One Year After CBN
Takeover - Proshare – Aug 07, 2017
AFTER ACQUISITION OF MAINSTREET BANK
2015
Following the acquisition, the indicators coming out from
Skye Bank showed clearly that something wasn’t right. Apart from falling below
regulatory standard in terms of Capital Adequacy (7.7%) and Loan to Deposit
(92%) in 2015, interbank (peer) comparison showed that it was the only bank
that made a loss (N40 Billion) and had a negative profitability ratio. In fact
between June 2014 when it bid for MSB and December 2015 when it had completed 6
months post integration of MSB, it had lost over 55% of its share value. (From
N3.58 in June 2014 to N1.58 in Dec 2015)
So what happened after the acquisition?
1. In October of 2015, the House of Reps ordered the investigation of the
sale of some banks by AMCON. One of those banks was MainStreet Bank. The Adhoc
committee raised several issues among which were
-
The
MBL Headquarters in Lagos was among the list of property schedule of Mainstreet
warehoused by the CBN but that the property was transferred to an individual
and Skye Bank as the purchaser of the Mainstreet now became a tenant. Skye
bank responded by saying that the property at No 51/55 Broad Street was
represented to Skye Bank at the time of the bid, and in the books of MBL as a
freehold property. The book value of the property at the time of acquisition
was stated at N1.2 billion. Skye Bank had valued it at N5.5 billion in arriving
at their purchase consideration for MBL. After acquisition, they discovered
that the property is actually on a Building Lease and the landlord had served a
demand notice for payment for a renewed term. In short they ended up being
tenants in the building they thought they owned.
- It is on record that as
at November 3, 2014 the main street bank confirmed the receipt of N121 Billion
from AMCON being the AMCON bond redemption. While this amount was in the kitty
of MainStreet Bank as at the time Skye Bank acquired it, how will they justify
the N128 Billion paid for the acquisition of MainStreet Bank? A little
footnote here. Skye Bank paid the balance for the purchase of MBL on the 31st
of Oct 2014 before the AMCON bond redemption. Did they factor this into their
purchase consideration in bidding N126 Billion for MBL?
2. Skye Bank found itself
offsetting a stream of tax liabilities not covered by its due diligence. This
is not unusual especially given delays in notice of tax assessment by tax
authorities.
3. The bank delayed in making available its Q4 2015 and Q1 2016 Annual Financial
reports. This sent alarm bells ringing in the market.
2016
By 2016, things took a turn for the worse. The
government determined implementation of the TSA did not help matters since the
bank was heavily dependent on public sector funds. It lost N125 Billion to TSA
alone. Add the fact of the N127 Billion of its own money used to acquire it and
several other payments tied to the same, then you are beginning to get the
picture of why the following low performance ratios was not a surprise.
- Liquidity
ratio at 8% as opposed to the regulatory minimum of 30%;
- CAR
10.48% vs. 16% (for SIBs);
- Loan to
Deposit Ratio of 98% vs recommendation ratio of 80%;
By March
2016, Skyebank requested for a 4 weeks extension to file its 2015 Audited
report.
By
May 2016, Skyebank remained unable to release its
Q4'15 and Q1'16 earnings reports, long after the expiration of the extension of
the grace period, without any rational reason for the delay. The market was
getting restless and analyst were issuing sell recommendations.
By July 2016, the CBN had seen enough. It
sacked the board and took control of the management of the bank. In reality the
CBN had little option. It had sanctioned the deal that ultimately was the death
kernel for this bank. The new board were given the following mandates.
-
Stabilize
the Bank
-
Achieve
the mandatory key regulatory ratio requirements.
-
Turn
around and return the Bank to profitability.
-
Improve
the quality of its risk assets
The
CBN injected in total about N690 billion into the bank in 48 months and gave it
a waiver on CRR (Cash Reserve Ratio) for two years. All to help the bank meet
up with its mandate. It was not only the CBN that was supporting, the SEC and
NSE was assisting too. For one, it retained SkyeBank’s listing status despite
not submitting its 2016 report and Q1/Q2 in 2017 as well.
The task of the new board was first to stop the bleeding and it did by getting the CBN to guarantee all deposits. The CBN take-over resulted in a run on the bank and deposits level fell by over 23%. Between July 2016 – March 2017 deposits went from N1.08 Trillion to N829 Billion. The new board also engaged the services of two professional accountancy firms – PwC and KPMG to handle routine audit, forensic audit and review of banking operations. These audits revealed the following:
2017
The
new board was very aggressive in chasing after debtors. In June 2017 it
announced that it had recovered N60 billion from some debtors. It also embarked
on a cost optimization programme aptly tagged 'Sustainable Value Improvement
Project' to reduce the high cost to income ratio. Despite its best efforts and
intentions, the liquidity ratio of the bank did not improve. It fell short of
the regulatory standard. The bank increasingly found it difficult to do normal
banking business as it was shut out of the lucrative FX market and had to deal
with a bucket load of litigation. They simply could not overcome the perception
and confidence issues that would normally attract business to it. Profitability
and adequacy ratio remind low and the negative equity issue persisted.
2018
On
September 21, 2018, The CBN finally took the decision to revoke the license of
Skye bank and create a bridge bank to take over its assets and liabilities. The
irony of the matter is that a bank that once bought over a bridge bank is
itself in need of a bridge to turn around its fortunes. The CBN announced that
it was further injecting another N786 Billion into the bank bringing it to a
total of N1.476 Trillion it has committed to rescuing this “too big to fail”
bank.
So far, I have tried to answer the questions:
I will now attempt to answer the question:
3. What role did insider related loans play to bring the bank down?
Four individuals / corporate entities accounted for over N446
Billion of insider related loans drawn from Skye Bank. They are as follows:
Dr Tunde Ayeni: (Former Chairman of the Board)
-
N89.4 Billion: Loan used to acquire Ibadan
Disco, Yola Disco and Nitel
-
N29.5 Billion: Discovered in suspense account
and directly linked to him
-
$6.8m: Diverted into his law firm and utilized
for personal use. Never paid back
Dr Festus Fadeyi (Father of Dr Jason Fadeyi Non-Executive
Director)
-
$616m (N191 Billion): For Pan Oceanic Group)
Jide Omokere Group
-
N110
Billion: For AEDC (N56 Billion), Cedar Oil and Gas (N22.4 Billion), Real Banc
Ltd (N31 Billion)
Forte Oil
Shares
-
N11.6
Billion: Alleged illegal conversion of 46.4million shares in Forte Oil Plc,
paid for by Afribank. Case is in court.
-
N12.8
Billion: Owed by AP to Afribank
Needless
to say that the bank would have been in a much better position if it didn’t
have to deal with these NPL. This brings me to the last question.
What is the end game?
There
are many reasons why we must ask this question.
1. So far we understand
that the CBN has committed N1.4 Trillion to rescuing this bank. When you
realise that the deposit base of the bank in July 2016 when the CBN took over
was N1.08 Trillion, you begin to wonder. Why bother? Would it not have been
cheaper to liquidate the bank and pay off depositors?
2. From the evidence
adduced so far, it is clear that the case of Skye Bank is not just that of
Corporate Governance Failure of the Bank, but rather it’s also a case of
Corporate Governance failure of the regulator. Skye Bank clearly at the time of
the bid did not meet the regulatory requirement to qualify as the preferred
bidder. This was acknowledged by CBN itself. Yet it went ahead to approve the
bid.
3. The agile observations
of some observers clearly shows that at the time of announcement of Polaris
Bank as the Bridge Bank, it was not incorporated in Nigeria. So in essence, the
CBN has committed N786 Billion to a non-existing organization. What exactly is
the game here?
Industry wide, the NPL
ratios rose consistently from 3.9% in 2013 to 15% in 2017. If you take note
that the regulatory standard for NPL, is 5%, then a 200% increase is a
screaming amber light. We are indeed in a banking crisis. We have just not
declared it yet.
Another
indicator is the industry average for Capital Adequacy which is barely hovering
above the regulatory benchmark. Banks are struggling and it is not only Skye
Bank that is in a bad situation, many banks are in it as well. I will refrain
from mentioning these banks for obvious reasons, but if you care to know,
obtain the last financials of those banks who have published theirs and subject
it to the same stress test we have done for Skye Bank. If a bank has not
published their report or is consistently seeking extension of filing with the NSE,
then you already have your answer.
In
conclusion, if the end game is not to stabilize the market, increase
profitability, manage credit risk, and bring back confidence to the financial
system, then whatever is going on is a joke on us and the market at large. It
is time to remove the veil and begin to ask the right questions.
Yinka
Ogunnubi
@yinkanubi
on twitter
Resources for this Article came from:
Timelines
of Skye Bank Plc Activities and Share Prices
Reference: Skye Bank Plc: One Year After CBN
Takeover - Proshare – Aug 07, 2017
Related
News
1. Governance
in New Polaris Bank, CAC Actions Offer A Clue Sept 24, 2014
2. NSE Suspends Trading on Skye Bank Shares
– Sept 24, 2014
3. Polaris Bank Encourages Depositors and
Customers to Continue to Maintain Normal Banking Relationship – Sept 22, 2018
4. Skye Bank Plc: Has CBN Finally Completes The Undertaker’s
Role? – Sept 21, 2018
5. CBN Revokes Skye Bank’s Operating Licence, AMCON to
Capitalise the Established Bridge Bank Sept 21,
2018
6. The History of Nationalised Banks Sept 21,
2018
7. Skye Bank Plc Announces Details of
Shareholder with 5pct and Above Stake
8. Skye Bank Plc: One Year After CBN
Takeover – Aug 07, 2017
9.
How to Buy a Nigerian bank with no
money – May 10, 2015
10. Reworking the Acquisition Maths of Mainstreet Bank by
Skye Bank Plc
12. Skye Bank - The Math
Adds Up says CBN, Acquisition Payment of Mainstreet Bank Done Nov 01, 2014
13. The Surprising New Math of Acquisition of Banks in
Nigeria – The Skye Bank Case – Oct 24, 2014
Signup with Facebook
Signup with Twitter
