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SKYE bank Plc: Confronting costs in expansion

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Skye Bank Plc started the business of banking as Prudent Merchant Bank Ltd in 1990. By 2000, it changed to Prudent Bank Ltd and became a Commercial Bank following approval by regulatory authorities. However, in 2006, during the Soludo-era banking consolidation, Skye Bank Plc emerged following a merger between Prudent Bank, Eko International Bank, Co-operative Bank, Reliance Bank and Bond Bank.

•Tunde Ayeni, Chairman Skye Bank & •Timothy Oguntayo, MD/CEO.
•Tunde Ayeni, Chairman Skye Bank & •Timothy Oguntayo, MD/CEO.

During the 2014, review year, Skye Bank continued its in-organic route to expansion through the acquisition of Mainstreet Bank, one of the Bridge Banks within the portfolio of Asset Management Company of Nigeria (AMCON). The acquisition was aimed at strengthening the bank’s retail presence nationally, wider market reach and enhanced economies of scale.

Skye Bank is a publicly listed entity with about 420,000 shareholders. It has three foreign subsidiaries operating in Guinea, Sierra Leone and the Gambia.

Perhaps in order to ensure that prompt and delightful services are available for customers, Skye Bank takes the issue of Information Technology very key in its operations.

In 2012, it adopted an ambitious IT Transformation Project which was completed in 2014 with a cut-over to the unique Flexible 12.0 Banking application.This Application has distinct transaction processing capabilities and is used in virtually every aspect of services delivery by the bank. Not surprisingly the Bank has consistently ranked high in the various performance metrics in the NIBSS payment.

Deposit mobilization and liquidity

Skye Bank understands that deposits constitute an important factor in achieving organic growth for banks. This is why it is always in the mood to create new and innovative products and channels to mobilize deposits. One of such initiatives is the direct sales agent system. Using this model, the bank intends to reach a wider base of prospective customers using the network of third party agents.

These agents are able to reach those customers who may not easily be reached at reasonable cost using existing channels. In fact this fitted into the bank’s focus on measured lower cost ones. It also aligned with strategy of deliberate empowerment of the small and medium scale businesses and establishing a niche in that sector.

But the bank’s deposit base in the first half of 2015 show a significant decline of about 12 per cent. In the full year audited results 2014 total conventional deposits from customers remained largely unchanged from N819billion of the preceding year; but entire liabilities classified as vulnerable by our analysts showed an upward movement from N844billion to N936billion.

Do customers consider Skye Bank safe enough to place their deposits and similar accounts? In 2014, the bank maintained relatively high proportions of cash and cash equivalents in order to meet requirements of customers and other parties. Our measure of cash ratio increased from 4% to 8% which suggested that vault cash was in a buoyant stage. All the other measures tracked by our analysts revealed declining liquidity.

Cash ratio (adjusted for vulnerability) declined from 24% to 12%. Liquid assets to total assets came down from 35% to 29% while adjusted liquidity ratio followed the same trend by declining from 36% to 17%. It is recognized that the entire industry faced liquidity challenges during the period and our analysts believe that the bank could have had unique challenging moments as it worked towards meeting required ratios and expectations from customers.

Impairment of loans and asset quality

During the review period Skye Bank extended credit facilities to customers’ worth about N623billion out of which more than 98% are secured in one form or another. Significant exposures are to Oil and Gas, Commerce and public sectors. As part of its avowed SME strategy the bank made conscious efforts to accommodate the small and medium businesses in its credit process. It also extended the geographical coverage of risk asset origination leveraging on the in-organic expansion through the acquisition of Mainstreet Bank.

As risk assets grew, Skye Bank strengthened its Enterprise Bank Management Framework with strict adherence to minimum threshold of official visits to locations and regular reporting governance structure. Notwithstanding, the inclement regulatory pressures and challenges of growth created condition for elevated impairment of credit assets during the period. Accordingly non-performing loans increased significantly from 3% to 6% requiring corresponding spike in required provisions from N12.7billion to N21.6billion.

It is, therefore, safe to infer that as business grew and risk assets followed, quality of the portfolio suffered a reverse in a manner that impacted other performance indicators. But the good news is that for Skye this appears to be a momentary cost of growth as it aspire to compete in the top 3 of the market.

However as the industry records sharp rise in impairments in 2015 Skye Bank appeared to be heading in better direction in its 2015 nine months financials showing 15 per cent decline when impairment is increasing in most banks.

Capital adequacy

As a result of Skye Bank’s growth appetite it had since inception been very active in capital raising process. In fact between 1989 and 2010, and between its legacy entities it took about 26 different financial actions that involved series of cash and share offers, including M&A share exchanges and capital reconstruction.

A cumulation of all these financial actions reserves from earnings resulted in a shareholders fund of N132billion as at 31st  December 2014. Relating this figure to our analyst’s estimate of riskness of the asset portfolio, we arrived at an independent risk weighted ratio of 16%, the same as in the preceding year of 2013. Considered against the prescribed regulatory capital minimum risk weighted asset ratio of 15% for international banks, the capital base is considerably adequate for the level of business risk the bank assumed in the period.

Although rapid expansion is driving the ratio to the limit and additional capital would be required in the near future to sustain the growth momentum. Not surprisingly the Directors decided to do a 100% earning retention in 2014/15 as a way of strengthening the capital base. Also the bank has gone back to the capital market in 2015 to raise N30 billion fresh capital.

Earning and profitability

With a total balance sheet size of about N1.21trillion, Skye Bank qualifies as a mid-tier operator in the Nigerian banking sector. It had always had an eye of growth and emerging as one of the top three banks in Nigeria using both organic and in-organic growth strategy. This had been supported by a sustained phase of positive earnings and profitable use of assets and opportunities for which shareholders were consistently rewarded.

In 2014 the bank passed through what was described as a muted phase in its growth trajectory. Gross earnings increased marginally from N130billion to N134billion on the back of equally muted growth on interest related income. Some key fee-based businesses declined in absolute terms. Although net margin in all interest related business inched up from 51% to 57%, they were comparatively lower than what some other peers achieved in the face of regulatory pressures resulting from tight monetary policy measures of the Central Bank.

Added to these are the unfavourable credit market conditions that led to higher impairment charges of N21.6billion up from N12.7billion in 2013. During the year also, pressure was brought to bear an net earnings following cost of acquisition, IT investments and integration. Operating expenses went up at rate beyond the marginal increase in income and a combination of these factors resulted in a sharp decline in net profit from N18.4billion in 2013 to N8.6billion in 2014.

Accordingly key measures of earning efficiency and profitability experienced what our analysts have described as moment reversal. Return on average equity came down to 7% from 16% just as earnings per share was 65k against N1.39 achieved in the preceding year. The bank was constrained to plough back all profit towards strengthening of capital base and funding of integration and expansion.

But in the tradition of rewarding shareholders, it opted for a bonus issue to keep the owners happy as it look forward to the future when the fruits of the investments made would be reaped by them. That future is perhaps around the corner in the 2015 financial year end, though results so far appear constrained.


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