The Central Bank of Nigeria on Monday dissolved the Management and Board of Skye Bank Plc following months of speculation about the financial health of the bank. The CBN Confirmed this via a circular on its website explaining why it took this decision. The CBN explained that it took this decision because Skye Bank had failed a stress test that it conducted for the bank.
Since the banking crisis in 2009/2010 the Central Bank conducts periodic stress test to gauge the financial health of commercial banks enabling them identify any potential case of a bank collapse before it occurs. In this particular instance, the CBN confirmed that it had taken proactive measures to dissolve the bank’s management and board because Skye Bank had persistently failed to meet its liquidity ratio and capital adequacy ratios benchmark set for commercial banks. Skye Bank’s non-performing loan ratios have also been higher than the benchmark set by the CBN.
Before we get to how this might affect you, we will attempt to explain what some of these ratios mean using simple illustrations that we hope you can understand.
A Bank’s liquidity ratio is simple the ratio of a banks liquid assets to its liabilities. A bank’s assets will include its loans, investments in bonds, treasury bills etc. thus cash and/or other investments that can easily be sold for cash (cash equivalents). Its liabilities are the total cash deposited into the bank by you and I as well as other loans that the bank might have borrowed to un-lend to borrowers. The CBN stipulates that a bank must have a liquidity ratio of about 30%. This means that its total cash and cash equivalents must at least be 30% of the deposits and other cash the bank might have borrowed. Skye Bank failing this test means that it does not have enough cash to pay its current liabilities. This in layman terms means that should a lot of people decide to withdraw their deposits from Skye Bank, the bank may not be able to pay them even if it sold all its assets.
A Bank’s Capital Adequacy ratio refers to how much equity a bank has in comparison to its loans. The Central Bank currently stipulates that a bank like Skye Bank must have a CAR of not less than 15%. Skye Bank has now breached that limit because it has far less equity when compared to its debts. This could be either because its loans have increased in proportion to its equity or because it has incurred a lot more losses due to bad loans.
The banks non performing loan (NPL) ratio is basically the percentage of the banks loans to borrowers that have gone bad. The Central bank sets this threshold at about 5% of the bank’s total loan portfolio.
This limits explained above are triggers for the CBN to enable it immediately identify banks that might be at risk of distress before they get into distress. The only way to avoid distress in this Skye Bank example, will typically be to raise more equity capital. If the bank has more equity (new cash) then it logically will meet all the ratio’s above (except for the NPL ratio). Unfortunately, the management of Skye Bank has not been able to raise capital in almost two years since it started shopping for new investors.
What it means for your money?
Those who deposited money in the bank
The Central Bank includes Skye Bank amongst its list of 8 Systemic Important Financial Institutions (SIFI). As a SIFI, the CBN considers any issue that affects the financial health of the bank as capable of causing more harm in the financial sector of the country. This is why they stepped in to sack the management of the bank.
The CBN also gave Skye Bank over a year to raise capital which would have meant that the current management will remain had it raised enough capital.
The CBN made it clear that the bank was not yet in distress but had breached a buffer that could lead it into distress if urgent action is no taken.
Based on this, depositors money is intact and will not be lost. The CBN says you need not panic to withdraw you cash as the CBN will ensure that you get your cash whenever you need.
“It is important to reiterate the fact that Skye Bank is not in distress and remains a healthy bank in the system. The CBN hereby assures depositors, shareholders and all relevant stakeholders that there is no reason for concern or panic as we seek their continued cooperation at this time.”CBN
The implication of a panic withdrawal of cash is that, when everyone does so, the bank finds it difficult to meet everyone’s demand. In fact, we doubt that there are any banks that will survive a panic withdrawal by its depositors.
Despite this, if we had our life savings deposited in that bank we will likely withdraw it. Your life savings are always better invested in Treasury Bills.
If we are however asked to open an account in Skye Bank today we will probably decide not to until we are sure that the bank has met all the limits set by the CBN.
If we are also asked whether to deposit a cheque into our Skye Bank account (we don’t have any) we will likely object.
Those who bought or want to buy Skye Bank shares
For those who own shares in Skye Bank, we will strongly recommend a sell at the moment. We have recommend sell in several articles on Skye Bank in the past and still maintain a sell rating on the stock today
Skye Bank, shares dropped by 9.5% to 95 kobo on Monday as investors rushed to dump the stock. At a point we saw over 80 million units on offer with no buyer.
Skye Bank results are not yet out so we expect a major write down leading to significant losses maybe reported. As such we won’t see dividends from this country in recent times.
Skye Bank’s share price may rise in again if it secures or announces a new strategic financial investor.
People who borrow money from the bank
Small Businesses who owe Skye Bank loans and have defaulted in payments should get set for an aggressive push to recover the loans. The new management will likely come down hard on them threatening to publish their names or call on their collaterals
If you are however on the verge of securing a loan from Skye Bank then count yourself unlucky as that loan may not be granted by the new management. No mater how far you have gone in your negotiations, they will likely put you on KIV
You should also expect new negotiated terms of your loan agreement if it is close to the end or on the verge of a renewal. Since the resignation of Management was mostly because of the bad loans on their books, the new management may likely want to renegotiate the terms of those loans.
I do business with the bank
For suppliers or contractors of Skye Bank, we advise that you hold on from delivering further supplies to the bank till you are very sure of how you get paid. If you supply essential products that the bank needs, then they pay you. If otherwise, apply caution and don’t fall victim
Make sure that you also secure all your documentation and get them ready in case you are called in during any investigation or request for proposals.
A new management also means an opportunity to know new people and get a mutually beneficial supply deal.