Special Report: Untold story of how Skye Bank’s bubble burst

Skye Bank Plc, one of Nigeria’s so-called strategically important banks (SIBs), came under the hammer of the Central Bank of Nigeria (CBN) on Monday as the apex bank sacked the board and management of the bank, in an extreme step usually reserved for internally irredeemable organisations.

Ordinarily, the power to appoint, change, alternate or discipline directors of an organisation lies in the hands of the shareholders at a general meeting.

The CBN, like other regulators, however performs oversight function of reviewing the personality of any prospective director or management staff in line with the code of ethics of the industry.

The aforementioned highlights the significance of the step taken by the CBN on Monday and clearly underscores that the sweeping sack of directors and management staff is a takeover of the running of the bank by the apex bank. Those affected by the whirlwind included the chairman, Dr Olatunde Ayeni, all non executive directors, the group managing director, Mr. Timothy Oguntayo; deputy group managing director, Mrs Amaka Onwughalu and two longest-serving executive directors-Mr Dotun Adeniyi and Mrs Ibiye Ekong.

Read Also : CBN takes over Skye Bank, sacks directors, management

The apex bank has appointed Alhaji Muhammad Ahmad, the founding director general of the National Pension Commission (Pencom), as the new chairman and Mr. Tokunbo Abiru, a former commissioner for finance in Lagos state and executive director at First Bank of Nigeria as the new group managing director.

While the bank and the CBN claimed that the former board and management staff voluntarily resigned their appointments, sources confirmed that the directors were shown the red card by the apex bank, but all the parties agreed to surreptitiously manage the change to avoid a run on the bank.

Governor of CBN, Mr. Godwin Emefiele, said the former directors had to leave because they have persistently failed to turn around the fortunes of the bank. The apex bank particularly made reference to the loan book and capital adequacy of the bank, noting that the bank’s non-performing loans are well above industry threshold and its capital adequacy below the minimum regulatory requirement.

Ripples Nigeria investigations showed that the indications to the bubbling risk management crisis had emerged earlier when the bank failed to meet the regulatory deadline for submission of annual report and accounts for quoted companies. Skye Bank is yet to file in its audited accounts for the year ended December 31, 2015, more than three months after the March 31, 2016 deadline set by the Nigerian Stock Exchange (NSE).

But the premonition of what to expect came when the management of the bank filed in a profit-warning stating that there would be significant decline in profitability in 2015 report as impairments from doubtful and bad debts weighed down the bottom-line of the commercial bank.

The management of the bank alerted the investing public that there could be “material decline in its profits for the full year ended December 31, 2015 compared with that of 2014”. The management of the bank attributed the expected decline to its decision to recognize increased impairment on loans to sectors severely affected by the prevailing economic headwinds which are yet to abate, especially the lull in oil and gas and real estate sectors.

Sources in the know confirmed that bad loans, poor investment decisions and inability to raise amenable equity and debt capital were the main drawbacks of Skye Bank. Most of the major investment decisions made by the bank were at huge premiums and assumptions, most of which have been undercut by macroeconomic changes. One was the October 2014 purchase of Mainstreet Bank Limited; a legacy bank that metamorphosed from the defunct Afribank Nigeria Plc. Afribank Nigeria, a older generation bank, was taken over by the CBN for failure to recapitalize and meet regulatory thresholds. With its capital market business badly damaged by the stock market recession, the only attractions in Mainstreet Bank were its agricultural business and government accounts. Skye Bank paid some N120 billion to acquire a bank emaciated by the stress of takeover and management changes.

While many analysts saw the inherent values in the additional branches, especially the reach to the Northern market, analysts had noted the risk of overpricing as the deal appeared quite expensive at a Price to Book Value ratio of 1.75 when Skye Bank itself was then trading at 0.34. Besides, the issue of funding for the cost acquisition was a major weakness.

Skye Bank has never come out clean on how it sourced funds to acquire Mainstreet Bank with analysts postulating that underhand raising of expensive debt capital might be the source of fund. Analysts had warned that if the acquisition were funded by borrowing, the terms of the loan might affect the profit performance of the enlarged bank. Besides, nearly all analysts, with the exception of the management of Skye Bank which was touting seamless integration, knew that the value excretion and integration of the two banks would take time. Most saw the acquisition in the light of acquisition of FinBank by FCMB Group and Equitorial Trust Bank (ETB) by Sterling Bank, acquisitions that have not yielded any material benefit.

Ayeni recently led the acquisition of the ailing national telecommunications company, Nitel and Mtel through a consortium that largely comprised of his firms. Skye Bank was said to be part of the financiers of the deal. The NATCOM Consortium, a special purpose vehicle created solely for the acquisition, revised its initial bid price of $221 million to $252.25 million to emerge the sole bidder and winner of the auction conducted by the Bureau of Public Enterprises. Analysts had estimated that NATCOM will need more than $1 billion to revive Nitel and Mtel. In a largely saturated telecoms market that had seen collapse of most small and emergent operators, many analysts saw the Nitel/Mtel as a long-term transaction that did not fit the profile of commercial banking.

Ayeni had also led Skye Bank into financing purchase of two power distribution companies (discos), Ibadan and Yola Electricity Distribution Companies, which have failed to witness any dramatic turnaround that could sufficiently meet expected returns. In a scary admission that showed the poor business sense, the management of Ibadan Electricity Distribution Company (IBEDC), later admitted that the new investors bought the distribution company without doing due diligence because the labour union did not allow anybody to come into the company. Foreign investors, who had earlier formed part of the consortia for the bids for the discos, balked at the idea of blind purchase, but Nigerian investors and financiers went for it. Skye Bank was said to have led a consortium of banks in a $160 million financing deal for the IBEDC. Ayeni not only threw luscious bids to acquire government assets, he also became entangled with politics, leading donation of N5 billion to the defeated President Goodluck Jonathan’s party campaign.

The decision of the President Muhammadu Buhari government to consolidate all government accounts unto a Treasury Single Account (TSA) with the apex bank left a hefty chink in the armour of Skye Bank as the directive sapped government funds and exposed the bank to liquidity challenges. The apex bank also slammed N4 billion sanction on Skye Bank for allegedly hiding and failing to remit some TSA funds, allegation the bank denied.

In another deal, Skye Bank provided funding for Pan Ocean Oil’s 40% equity under the Joint Venture with Nigerian National Petroleum Corporation (NNPC). Pan Ocean is the operator of the OML 98 under a 60:40 Joint Venture with NNPC. The bank’s finance was for Pan Ocean Oil’s Ovade-Ogharefe Gas Processing Plant (OML98). The Ovade-Ogharefe Gas Processing Plant was designed as a Carbon Emission Reduction Project with the capacity of delivering 200mmscf/d of dry gas to the domestic gas market for power generation and industrial development. The Gas Plant is located in the Ovade-Ogharefe area of the Niger Delta Region. With the slump in global crude oil and the resurgent restiveness in the Niger Delta, Skye Bank has seen its oil and gas financing deals and loans becoming unnecessarily complex and risky, with elongated tenor and less returns. In another deal, the bank provided financing for an indigenous oil firm, Waltersmith Petroman Oil Limited, the operator of the Ibigwe field located in OML16 in Ohaji/Egbema Local Government Area of Imo State, Nigeria. The field was previously operated by Shell/Agip/Elf/NNPC Joint Venture and was awarded to Waltersmith during the Marginal Field Bid Round held in 2003. The company was incorporated in 1996 as a joint venture between Waltersmith and Associates Limited, a Nigerian company and Petroman Oil Limited of Calgary, Canada to operate as an oil exploration and production company. In 2001, Walter Smith Petroman Oil Limited became a wholly owned Nigerian company with the divestment of Petroman Oil Limited. The funding for the Pan Ocean was undertaken when Oguntayo was the bank’s executive director, corporate and investment banking. He also oversaw several high-profiled financing deals in the risky aviation industry, including funding a fledging domestic airlines and an in-flight food business. The bank also has considerable exposures to the illiquid real estate sector, which crisis has been compounded by declining incomes and purchasing power generally. The Nigerian foreign exchange (forex) crisis had also worsened the financial position of Skye Bank, which had earlier raised dollar-denominated loans. Skye Bank had raised some $150 million tier 11 capital.

Further details of the financial transactions that brought down Skye Bank are expected to come out as the new board and management have indicated that they would carry out thorough examinations of the books of the bank.