Fear of ‘distress’ looms over banking sector

Godwin I Emefiele official portrait(10

Godwin Emefiele, CBN Governor

The recent decision of the Central Bank of Nigeria to effect leadership change at Skye Bank Plc elicits speculation as to whether the banking sector was heading to another round of distress, writes Osaze Omoragbon

The recent decision of the Central Bank of Nigeria (CBN) to effect a leadership change at Skye Bank Plc, one of Nigeria’s deposit money banks, came as a shocking news to many but discerning analysts were not surprised by the action of the apex bank.

The CBN wielded the big stick on July 4, this year, when it sacked Olatunde Ayeni and Timothy Oguntayo as Chairman and Managing Director respectively of Skye Bank. The apex bank appointed Mr Tokunbo Abiru as new Managing Director and Alhaji M K Ahmed as Board Chairman.
Although the new management of Skye Bank has promised to shore up the bank’s liquidity to enhance its profitability within the shortest period, many depositors are not comfortable with the trend of events. Indeed, as news of the change in management filtered into town, some jittery depositors besieged the bank to pull-out their money while investors dumped the shares of Skye Bank. Not even the reassurance by the CBN that the bank is healthy could assuage their feelings as they questioned the apex bank’s judgment. “If the bank is healthy, why did the top management resign,” says Kayode Bankole, an aggrieved depositor with the bank.

The bank has reportedly lost billions of naira in value in the last few weeks. The issue, according to sources in the bank, has been discussed in hushed tones for fear of being accused of de-marketing. “When they missed the deadline to issue their 2015 financial statement, many began to question the health of Skye Bank,” says a source in the bank, who traced the problem to massive exposure to the oil and gas sector as a result of insider dealings. Although Skye Bank is yet to release its 2015 financial report, figures gleaned from the 2014 financial report shows that the bank is exposed to the oil and gas sector to the tune of N240 billion. Out of this amount, Newcross Exploration and Production, and Pan Ocean Oil Corporation, linked to one of the non-Executive Directors of the bank owed N8.35 billion and N17.077 billion respectively while about N20 billion was linked to another director in 2014.

Olatunde-Ayeni

Olatunde Ayeni, former Chairman, Skye Bank

Pundits have been wondering if the latest development is a sign that the banking sector was heading for another round of distress. While wielding the big stick, the apex bank found that Skye Bank had fallen short of the minimum thresholds in critical prudential and capital adequacy ratios. Last year, the apex bank asked three unnamed banks to shore up their capital adequacy ratios, which many now believed Skye Bank was a part of. The CBN has, however, dismissed rumours making rounds that some banks may be heading for distress. In a press release, the apex bank said neither Skye Bank nor any other bank in the country is in distress and labelled the rumour as the handiwork of mischief makers. “….the CBN wishes to reiterate in the strongest terms that these rumours and speculation are untrue and do not reflect the actual health of individual banks and indeed the entire industry,” the CBN stated.

Observers, however, are miffed by what they call CBN’s bad communication strategy. They are surprised that the apex bank is trying to calm the storm after unnerving the public. “The CBN could have been discreet about it. If the bank is not heading for distress why would the CBN be involved in the leadership change and not the shareholders,” asks a financial analyst who preferred anonymity. For them, depositors have a right to panic after losing money in previous episodes of distress. Some are sceptical about CBN’s sincerity in the whole matter, citing when it defended the decision to peg the naira only to turn around to loosen its grip on the exchange rate while singing another tune.

Undone by TSA?
Since the enforcement of the Treasury Single Account (TSA) and the drop in the price of crude oil in the international market, all has not been well in the banking sector even as many deposit money banks show signs of ailments. Several issued profit warnings and lost value from drop in their share prices while laying-off workers to cut cost. The banking equity index has edged south in the last one year. First Bank Nigeria saw its profit plummet by 82 percent while Diamond Bank endured 78 percent drop in profit. First City Monument Bank (FCMB), Ecobank, Skye Bank, and First Bank among others have downsized their workforce in a bid to rein in cost.

Credit extended to the oil and gas sector have all gone sour as debtors cannot make good their promise. Oando, a leading downstreat oil and gas company admits “significant doubt” about its ability to repay loans. While Afren, an oil exploration company, went under last year. Non-performing loans in the industry have more than doubled to N1.4 trillion in 2005 from about N660 billion in 2014.Credit risk concentration which ought to have been improved in the reinforced prudential guidelines introduced in 2010 seems to have deteriorated as many of the banks flouted their own rules on risk management. By extending a disproportionate share of their loans to the oil and gas sector, their financials have mirrored the vagaries of the international market for crude. The TSA which pulled over N3 trillion from the deposit money banks dealt a significant blow, prompting analysts to question the wisdom of such a policy that could unravel the banking sector.

Indeed, there is the fear that some other banks may follow the way of Skye Bank, having the CBN stepping in to avert similar crisis. This is due to the fact that crude oil price is yet to recover to the level it attained before its descent. With Nigeria’s credit rating taking a hit, banks are also expected to receive poor ratings in the light of their poor financials. This is expected to worsen their plight even as investors count their losses. It is surely going to get worse before it gets better.n

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