It is no longer news that the Central Bank of Nigeria (CBN) on Monday dissolved the management team of Skye Bank. What is now currently being analysed is the suggestion that we might be seeing another Lehman Brothers meltdown playing out. Thus we can’t just view this as one financial firm melting down but rather an act that could precipitate into an octopus wide-spread across the financial system through what is known as counterparty risks.
Data from the financial statement shows that as at Full Year (FY) 2014, the major counterparties to Skye Bank include the Africa Finance Corporation with N17.1 billion, Afrexim Bank with N16.1 billion, and United Bank for Africa Plc, New York with N11.76 billion.
In total Skye Bank owes about N131.2 billion to local and foreign borrowers with foreign loans making up 75 percent of the total.
Renaissance Capital’s banking analyst Soji Solanke notes:
“We like the CBN’s approach in subtly replacing Skye’s board and most of the executive management team, but think more will need to be done in reassuring counterparties on the bank’s going concern status. Logically, we expect the CBN to provide some form of liquidity support or guarantee to keep the bank’s operations running smoothly, pending when the capital, liquidity and asset quality challenges are brought to a reasonable resolution.”
Well we don’t know about that at Nairametrics seeing that we expect those FX loan figures to go up by at least 40 percent in naira terms, following the recent floating of the currency. Counterparty risk is likely to crystalize if Skye Bank is unable to repay its loans putting the local banks on the line to incur severe losses. An example of a counterparty risk could be UBA agreeing to repay a foreign loan obtained by Skye Bank should the latter fail to pay as and when due. This sort of agreements are typically done via bank guarantees. This risk is real and could be the major reason why the Central Bank has also decided not to liquidate the bank.
Skye Bank is designated as one of the eight Systemic Important Banks in Nigeria putting it right under the purview of the CBN in matters that affect the overall financial structure of Nigeria. The CBN defined SIFI’s as “financial institutions whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity” . A SIFI can be a bank, an insurance company, or any other financial institution whose failure might trigger a financial crisis.
Perhaps that is why Skye Bank and we dare say the CBN has “refused” to release its FY 2015 results 7 months into a new financial year.
It will be interesting to see if these counterparties will be bailed out by the CBN (ala U.S Federal Reserve bailing out AIG to pay counterparties like Goldman Sachs 100 cents on the dollar), or if these lenders (UBA, AFC, Commerzbank, Standard Chartered etc), are to take significant haircuts for not doing their due diligence on Skye Bank.