SkyeBank - The Rise, The Fall And The Bridge

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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.

  1. Before The Acquisition of MainStreet Bank;
  2. During the Acquisition of MainStreet Bank; and
  3. After the acquisition of MainStreet Bank.

 

With the help of timelines and publically available data, I will try to answer the following questions.

  1. What led to the takeover of the bank and the withdrawal of their operating license?
  2. What role did the regulator play in the lead up to this decision?
  3. What role did insider related loans play to bring down the bank?
  4. What is the end game?

 

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.

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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


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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.

 

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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

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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)


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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:

  1. A negative capital position of N690billion as at December 2016. Caused mainly by impairment of loans to the tune of N529billion and transactions in suspense to the tune of N280billion, (relating to BS and P/L manipulations from 2006 to 2016 and direct fraudulent cash withdrawals by known individuals).
  2. Evidence of inappropriate financial reporting. The Forensic Audit revealed that the Bank operated two sets of books and this was responsible for the regulators/auditors inability to detect the massive losses and infractions, particularly the balance of N280billion in suspense accounts. A special board committee was commissioned to unravel the mystery behind this N280 Billion.
  3. Unsustainable high cost to income ratio. The Bank was significantly oversized in terms of branches and personnel compared to industry standards and was incurring huge expenditure in keeping its size. This compounded the bank's negative capital position as it made a loss of about N10billion monthly.

 

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:

  1. What led to the takeover of the bank and the withdrawal of their operating license?
  2. What role did the regulator play in leading up to this decision?

 

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?

 

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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. 

 

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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.

 

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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

 

 

Proshare Nigeria Pvt. Ltd.

 

 

Resources for this Article came from:

  1. https://www.proshareng.com/admin/upload/reports/SkyeAfterCBNTakeover.pdf
  2. https://www.proshareng.com/news/Monetary%20Policy/The-Surprising-New-Math-of-Acquisition-of-Banks-in-Nigeria-%E2%80%93-The-Skye-Bank-Case/24775
  3. https://www.proshareng.com/news/Mergers%20&%20Acquisitions/How-To-Buy-A-Nigerian-Bank-With-No-Money/27053
  4. https://www.proshareng.com/admin/upload/reports/11006-FSRJune2017RevisedSAComments-proshare.pdf
  5. https://nairametrics.com/meaning-of-capital-adequacy-ratio-as-defined-by-the-central-bank-of-nigeria/
  6. https://nairametrics.com/cbn-the-three-banks-that-have-just-failed-capital-adequacy-test/ 
  7. https://www.cbn.gov.ng/out/2015/bsd/1.revised%20guidance%20notes%20on%20regulatory%20capital.pdf
  8. http://www.capitalassets.com.ng/TechnicalAnalysis.aspx?comid=127&sel=6&datebeg=30%2f05%2f2012&dateend=30%2f05%2f2013
  9. https://guardian.ng/politics/reps-move-to-probe-amcon-non-oil-remittances/
  10. http://businessnews.com.ng/2014/02/27/amcon-sell-enterprise-mainstreet-banks-october/

 

Timelines of Skye Bank Plc Activities and Share Prices

 

S/No

Date

News Title

Share Price

NSEASI % Perf.

1

24-Oct-14

The Surprising New Math of Acquisition of Banks in Nigeria – The Skye Bank Case

2.75

-0.03

2

27-Oct-14

Reworking the Acquisition Maths of Mainstreet Bank by Skye Bank Plc

2.66

-0.93

3

1-Nov-14

Skye Bank - The Math Adds Up says CBN, Acquisition Payment of Mainstreet Bank Done – Nov 01, 2014

2.4

-1.13

4

10-Nov-15

All eyes still on Skye Bank s capital raise

1.99

-0.64

5

29-Mar-16

SKYEBANK Issues Earnings Guidance for Financial Year Ended 31st December 2015

0.92

-2.40

6

31-Mar-16

SKYEBANK Seeks Four-Week Extension to File its 2015 Audited Financial Statement

0.91

0.64

7

13-Apr-16

Why investors should expect a contained earning from Skye Bank

0.93

-0.01

8

31-May-16

Skyebank and The Prolonged Delay on Earnings Announcement

1.31

-4.29

9

16-Jun-16

Expectedly, S&P rates Skyebank a CCC+ on back of Economic & Liquidity Concerns

1.2

2.14

10

4-Jul-16

Nigeria s Central Bank Takes Over Skye Bank - Sacks Board Over Capital Issues

0.95

-1.04

11

11-Jul-16

Nigeria's Skye Bank Downgraded To 'CCC-' On Heightened Default Risk

0.79

-0.14

12

14-Jul-16

Tracking Skye bank's Share Price: 5days After

0.61

-0.10

13

21-Jul-16

Tracking Skye bank’s Share Price: 10days After

0.85

-0.79

14

21-Jul-16

CBN Affirms Confidence in Skye Bank, Institutes Guarantee Line

0.85

-0.79

15

27-Jul-16

Tracking Skye bank’s Share Price: 15days After

0.76

0.93

16

29-Jul-16

SKYEBANK Declares N40.73bn Loss in 2015 Audited Results SP N0.70k

0.7

-0.13

17

1-Aug-16

Skye Bank Plc Reports Q4 2015 Results; Further Deterioration Expected in Q1 and Q2

0.7

-0.60

18

2-Aug-16

All Round Pressure Sinks Skye Bank FY'15 Earnings

0.7

-0.04

19

9-Aug-16

Skye Bank Plc Seeks Extension to file its Interim Financial Statements for Q1 and Q2 2016

0.69

-0.45

20

11-Aug-16

Tracking Skye bank's Share Price: 25days After

0.67

-0.51

21

12-Aug-16

Skye Bank Plc Appoints Babatunde Osibodu as General Counsel

0.64

-0.12

22

17-Aug-16

Skye Bank is Neither Distressed Nor Liquidated - CBN

0.66

0.18

23

7-Dec-16

Skye Bank Ratings Suspended Due To Lack of Sufficient Information

0.5

0.01

24

6-Feb-17

Skye Bank Plc Announces the Resignation of some Executive Directors

0.5

-0.83

25

31-Mar-17

Skye Bank Plc to file 2016 Audited Financial Statements on or before 12th May, 2017

0.5

-0.07

26

13-Jun-17

Skye Bank Plc Notifies on the Late Release of 2016 Audited Financial Statements

0.58

-0.28

Source: NSE, Proshare Research

Reference: Skye Bank Plc: One Year After CBN Takeover - Proshare – Aug 07, 2017

 

 

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Related News

1.     Governance in New Polaris Bank, CAC Actions Offer A Clue Sept 24, 2014

2.    NSE Suspends Trading on Skye Bank SharesSept 24, 2014

3.  Polaris Bank Encourages Depositors and Customers to Continue to Maintain Normal Banking RelationshipSept 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

11. How Banks, Govt Policies Kill Manufacturing in Nigeria - The Multi ... – Aug 21, 2015

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

 

 

 

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