Skye’s Crash Casts Doubt Over Health of Small Nigerian Banks

LAGOS (Capital Markets in Africa) – The collapse of Skye Bank Plc is darkening the outlook for Nigeria’s other small lenders struggling to recover from the economy’s contraction two years ago, and threatening to derail the regulator’s ambitions of expanding the industry.

The Central Bank of Nigeria last week revoked the lender’s license for failing to meet capital and liquidity thresholds since the authorities first intervened to rescue the business in 2016. The Lagos-based company’s battle to raise more cash as a buffer against potential shocks, is playing itself out in other parts of the industry, with some of Skye’s peers resorting to the sale of bad loans or ditching business outside of Nigeria to clean up their balance sheets.

“We don’t know if there are one or two such small banks in the system,” said Abiodun Keripe, head of research and strategy at Elixir Investment Partners in Lagos. “The CBN needs to come out clearly and issue a report on the health of the financial market. That will help improve confidence.”

Central bank Governor Godwin Emefiele this week said the industry remains sound even though “in every chain, there will always be strong points and weak points.” The regulator is striving to ensure there are more banks rather than having them liquidated, he told reporters after a monetary policy meeting in the capital, Abuja.

Protect Jobs
“We’re embarking on a journey to keep a bank alive, to protect depositors’ monies and also ensure that we don’t throw over 5,000 staff of that bank into the labor market,” the governor said. The central bank didn’t respond to requests for comment on Thursday.

The regulator established Polaris Bank to take over the assets and liabilities of Skye and asked the Asset Management Corp. of Nigeria to capitalize the new entity with a view to eventually selling it. The actions are invoking memories of government bailouts after a credit crunch in the West African nation in 2009, when Amcon was set up to take on the bad debts and save the industry.

While the country’s biggest lenders now have strong capital buffers as well as solid assets and earnings, developments with Skye show the industry consists of “a mix of stable and not-so-stable banks’’ said Olubunmi Asaolu, a banking analyst at Lagos-based FBNQuest.

“The smaller banks have generally been closer to a precarious position than the market would like since the end of the last crisis in 2009,” he said. “For anyone to invest in a tier two bank, they need to be convinced the opportunity is significant.”

Stress Tests
Stress tests by the central bank showed that only the largest banks would withstand a 50 percent increase in non-performing loans. NPLs as a percentage of total credit stood at 15 percent at the end of June 2017 from 12.8 percent at the of December 2016, the regulator said in March.

Unity Bank Plc — which has yet to release 2017 financial statements after reporting its second straight year of negative capital adequacy ratios in 2016 — is trying to raise about 270 billion naira ($743 million) to recapitalize its operations after selling its bad-loans book, Chief Financial Officer Ebenezer Kolawole said this month. It hopes to conclude talks with an investor during the first half of 2019.

Diamond Bank Plc, Sterling Bank Plc and Wema Bank Plc all have capital adequacy ratios just above the regulator’s minimum thresholds, making it harder for them to write new loans. Furthermore, their price-to-book ratios range from 0.1 to 0.4 — signaling investors doubt the company’s assets are worth as much as their accounts indicate.

That’s hindering their ability to raise capital, said Lekan Olabode, a bank analyst at Vetiva Capital Management Ltd. in Lagos.

Shares in Wema Bank have dropped 8 percent since Skye was seized a week ago, while Diamond Bank has declined 6 percent and Unity Bank 5 percent. Sterling Bank has gained 3 percent over the period. Skye’s stock, which had slid 50 percent in 2017, rallied 54 percent this year before it was suspended last Friday.

The central bank’s swoop on Skye will result in shareholders losing money, putting a “lot of fear in people” about backing other small lenders, Vetiva’s Olabode said. “The challenges are there.”

Source: Bloomberg Business News