Nigerian Banks shouldnt rely on CBN sovereign support due to ‘B+’/Negative – Fitch

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Lagos Nigeria -17 October 2018: 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), Naija247news has learned.

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Our Support Ratings for Nigerian banks are ‘5’, indicating that sovereign support cannot be relied on, and we assign 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.

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 local media reports. (We cannot verify this because Skye has not published 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 NGN786 billion (USD2.6 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.

Godwin Okafor
Godwin Okaforhttps://naija247news.com
Godwin Okafor is a veteran Financial Journalist, Internet Social Entrepreneur, and the visionary Founder of Naija247news Media Limited. With an extensive career spanning over 16 years in financial journalism, Godwin possesses a wealth of experience that seamlessly bridges both traditional and digital media landscapes. His journey in journalism commenced at Business Day, Nigeria, where he laid the foundation for his prolific career. In 2010, Godwin took a bold step by founding Naija247news Media, a platform that has since become a prominent player in delivering timely and accurate news. Educationally, Godwin Okafor holds a Bachelor's degree in Industrial Relations and Personnel Management from the prestigious Lagos State University, Ojo, Lagos. His commitment to continuous learning led him to the Lagos Business School, where he further honed his skills. Additionally, he is recognized as a Fellow of the University of Pennsylvania, having successfully completed the Wharton Seminar for Business Journalists. Throughout his illustrious career, Godwin has earned acclaim by winning numerous journalism awards, a testament to his dedication to excellence in reporting. Beyond his role as a Financial Journalist, Godwin Okafor wears the hat of the Chairman at Emmerich Resources Limited, the publishing entity behind Naija247news. His visionary leadership has played a pivotal role in shaping the media landscape and establishing Naija247news as a trusted source of information. Godwin Okafor's multifaceted expertise, commitment to journalistic integrity, and leadership in the realm of business journalism underscore his influential presence in both the media and entrepreneurial spheres.

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