The Skye can be big enough again!

Few issues elicit a more contentious debate than banking in Nigeria, especially after the dramatic collapse of a large section of Nigeria’s banking industry in 2009. It is in this context that many would have viewed the recent intervention by the Central Bank of Nigeria (CBN) in Skye bank with trepidation. But this time is different for two important reasons.

First, while there were large-scale insider dealings and abuses in the period leading to the collapse of some banks in 2009, it was largely triggered by the dramatic fall in oil price in 2008, and the consequent increases in loan default ratios. Essentially, the banking crisis of 2009, while it has critical peculiar issues related to each bank, there were industry systemic issues as well.

Second, and following from first, regulation has improved tremendously since the 2009 banking crisis episode. There have been significant improvements in the treatment of and the ability of the industry to contain loan defaults. This is especially evident because, while the last two years has provided us with same scenario and worsening economic conditions like in 2009, we have not seen the same rate of non- performing loans that we saw then. In 2009, average non performing loans for the industry was in excess of 30%, whereas, given the decline in oil prices in the last two years, the strict implementation of the Treasury Single Account (TSA), the rise in inflation and fall in real interest rates, and the diminishing opportunities for appropriate risk lending, the non performing loans, though growing in the last year, is still very low compared to 2009.

This improvement is tied and can be traced to the tighter requirements on banks since 2009, improving prudential and macro-prudential regulation. Therefore, if there is one thing that is clear about banking crises and banks’ collapse, it is that a bank does not merely implode on the basis of macroeconomic and industry or sector-specific conditions, but also because of peculiarities to the bank. In the case of Skye bank, very clear breaches of established prudential guidelines emerged.

Nonetheless, I understand why some may continue to ask why the CBN intervened if the bank is not insolvent, not illiquid and still one of Nigeria’s systemic banks. My answer is that the CBN acted because of these critical parameters of the bank. Banking business is not like that of the provision of some other products and services. It entails and is sustained by trust. The licence to collect depositors’ money underlines that trust. Once that trust is threatened, and it was in the case of the former management of Skye Bank, by their inability to adhere strictly to established prudential guidelines. The former management breached established CBN’s prudential guidelines, especially related to director related loans, underlined by the collapse in the clear division between the executive and the board (a lesson for all publicly quoted companies), and a classic failure of standard corporate governance procedures and practices. It was time to go.

The consequences of this breach of prudential guidelines are evident in the published 2015 reports of the bank. Though earnings grew dramatically, the interest expenses unexpectedly jumped by 75%. The growth in interest expenses, no doubt, was symptomatic of liquidity and growing financial strain. This led to a significant fall in net interest income by 19.5% when compared to 2014. Expectedly, net operating income fell by 35.6% to N50.4 billion compared to N78.3 billion and N68.58 billion recorded in 2014 and 2013 respectively. In line with the general rising costs of operation across the banking sector, the combination of both staff costs and administrative expenses pushed the bank into a loss after tax of N40.73 billion which is a sharp reversal from the post tax profits of N18.72 billion posted in the 2014 financial year.

However, for the future, though Skye Bank’s total assets fell by 13.6% in 2015, it remains well above the N1 trillion mark. More significantly, the bank’s loan portfolio grew by a healthy 9.2% to reach N704.896 billion from N645.8 billion in 2014 and N549.9 billion in 2013. Also, deposits by customers, though having declined markedly by 20% compared to 2014-year end level, remains healthy at N753.15 billion. This, without a doubt, compares very favourably with the bank’s peers in the industry.

And this is where the new management, headed by Tokunbo Abiru, as CEO and M. K. Ahmad as the Chairman of the newly formed board, both highly judged to have proven track record of competencies, comes in. Following the consolidation exercise of 2005, from which Skye Bank emerged one of the important systemic banks in Nigeria, growing its branch network to reach over 400, staff strength above 11,000, and consistent increases in its earnings since then, following a coherent strategy, the future is about returning to the core values and strength that made the Skye big enough for everyone in the first instance. It still has a solid franchise that was first established in Lagos and the South West but has spread to other regions of the country. The future of the bank will be assured by competing on existing distinctive capabilities. I thank you.

Ogho Okiti