The murky waters of Polaris Bank sale – the unknown unknowns

In the book, Never Split the Difference, best-selling author Chris Voss referred to the concept of the black swan which speaks to the phenomenon of the unknown unknowns as popularised by former US defence secretary Donald Rumsfield.

The unknown unknowns are essentially things or events “that you do not know that you do not know” which in risk terms can make or mar a business decision. The latest news about the sale of Polaris Bank to a strategic investor contains a lot of unknown unknowns that Nigerians or even the CBN, AMCON, and NDIC cannot yet comprehend.

Nigeria’s central bank in conjunction with AMCON announced it has reached a landmark agreement to sell Polaris Bank to Strategic Capital Investment Limited (SCIL) for a consideration of about N50 billion. The buyers are also on the hook to repay a bond of N1.3 trillion.

The transaction has been in the works for some months now, culminating in a flurry of denials by the bank executives when news of a possible sale leaked. Around the same time, members of the House of Representatives had issued an order to the apex bank to halt the sale of the bank.

The sale of Polaris Bank has taken about 6 years (since July 4, 2016) to consummate, starting from when the apex bank sacked the board and management of Skye Bank for failing to recapitalize the bank after several accumulated losses. Just a year earlier in 2015, Skye Bank had acquired Mainstreet Bank, another bank that was taken over by the central bank, a transaction that is alluded to have hastened its demise. By 2018, Polaris Bank was created as a bridge bank, effectively taking over the assets of Skye Bank. This makes the latest sale rather ominous considering the limited details about the transaction that is out there.

To facilitate the operation of the bridge bank, the central bank issued a bond with a face value of N898 billion with a future value of N1.305 trillion, injecting the proceeds into the bridge bank through AMCON. The bond was to be repaid over a 25-year period. This debt has been recognized in Polaris Bank’s balance sheet since then as a “reorganization reserve” suggesting it is a claim on the company’s shareholders’ funds. In its 2021 annual report, the amount was collapsed into the bank’s share premium paving the way for a potential acquisition.

“Polaris has been operating as a bridge bank since 2018 when the Central Bank of Nigeria intervened to revoke the licence of the former Skye Bank Plc and established Polaris Bank to assume its assets and certain liabilities. As part of the CBN intervention, consideration bonds with a face value of N898 billion (future value of N1.305 trillion) were injected into the bridge bank through AMCON, to be repaid over a 25-year period. These actions were taken to prevent the imminent collapse of the bank, enable its stabilisation and recovery, protect depositors’ funds, prevent job losses and preserve systemic financial stability.” – CBN

According to a press release shared by the CBN, the acquirer SCIL paid the upfront purchase consideration of N50 billion and in accepting the terms will repay fully the sum of N1.305 trillion being the consideration bonds injected by the CBN. It, however, did not explain how the N1.3 trillion will be paid by the new owners. Will the bank repay the bond from future profits, capital raise, or new debts? Did they agree on an amortization schedule with clear periodic repayment terms? Or is it positioning itself for another acquisition or merger that could then put a final end to this story? Is there a guarantee that has been obtained for repayments? Are there clauses that are condition precedents to repaying the N1.3 trillion? Who the people behind SCIL? These are all tenable questions taxpayers will be curious to know considering the history of the bank.

Assuming the loan is amortized over a 25-year period, the central bank will recover about N52 billion annually from the bank. Last year the bank reported a profit after tax of N19.4 billion on gross earnings of about N105 billion. The profit is much lower than the N28 billion reported a year earlier. Despite the profits, the bank still made provisions in loan losses for N3.3 billion and N9.3 billion in 2021 and 2020 respectively. Upon acquisitions, it is also likely that there could be more losses that will be provided for as the new owners scourge through the books. The bank will therefore need to operate at a profit level significantly higher than N52 billion annually to comfortably repay the loans.

There are so many unknown unknowns but the central bank needs to mitigate the information gap by providing taxpayers with a lot more information about this transaction. Surely, we have not heard the last of this transaction. Will the house of reps call for another review of the sale or stop it? Will there be court orders or shareholder revolts?

It is perhaps not enough to issue a press release that did not contain enough details about the transaction. The central bank must provide more detail and grant a press conference responding to questions about this transaction. One can only hope that this murky transaction will not rear its head again as another bad bank.