Nigerian banks to receive less support on sovereign weakness despite Skye Bank conversion – Fitch

Recent actions by the Central Bank of Nigeria (CBN) to address problems at failed Skye Bank do not mean that sovereign support for the Nigerian banking sector will always be forthcoming, Fitch Ratings says.

“We continue to believe that sovereign support for Nigerian banks cannot be relied on, given the sovereign’s weakness (‘B+’/Negative),” the foremost rating agency said in a recent press statement.

To this end Fitch says its Support Ratings for Nigerian banks are ‘5’, indicating that sovereign support cannot be relied on, adding that it assigns them Support Rating Floors of ‘No Floor’, meaning that the banks’ Long-term Issuer Default Ratings are not subject to a sovereign support-related minimum.

“This also reflects the absence, in our opinion, of formal messages from the authorities on their willingness to support the banking system,” it said.

On 21 September, the CBN announced that it had revoked Skye’s banking licence and that all of Skye’s assets and liabilities, and most of its employees’ contracts, had been transferred to a new bank, Polaris Bank, created for the purpose.

According to the authorities, losses were not imposed on depositors or creditors, as Skye’s assets and liabilities were transferred at book value. Skye’s shareholders have lost their investment in the bank, but this is unlikely to come as a surprise to them because Skye was operating with negative net worth, according to reports, which explains the non-publication of audited financial statements since 2015.

The CBN refers to Polaris as a “bridge bank”, mirroring resolution terminology, such as in the EU’s Bank Recovery and Resolution Directive (BRRD). However, the ability of resolution authorities to impose losses on creditors when dealing with failing banks is central to advanced resolution frameworks, and no such legislation is in place in Nigeria.

The manner in which bank failures are addressed in Nigeria does not appear to have changed since 2011, when similar “bridge banks”, capitalised by the Nigeria Deposit Insurance Corporation (NDIC), were established to acquire the assets and liabilities of several problem banks.

Polaris follows a broadly similar pattern. It will be recapitalised, initially with N786 billion ($2.6 billion), by the Asset Management Corporation of Nigeria (AMCON), a public-sector entity funded by mandatory contributions from the banking sector.

AMCON was established to acquire and eventually sell underperforming banks and selected bank assets. NDIC will operate Polaris and guarantee all of its deposits. This should help to preserve depositor confidence in Nigeria’s banking system, which is credit positive for the banking sector. Skye was a domestic systemically important bank, and maintaining financial stability is particularly important given Nigeria’s volatile operating environment.

“In our view, the authorities were slow to solve Skye’s difficulties. The bank’s problems, arising partly from weak governance, were not new. In July 2016, the CBN forced the resignation of Skye’s Group Managing Director/CEO and all of its non-executive directors, and appointed new management.

“The bank’s liquidity was so weak that it required permanent liquidity support from the CBN, and shareholders did not respond to requests to provide more capital. The bank is reported to have been in breach of minimum thresholds for key prudential ratios,” Fitch said.