GCR downgrades Skye Bank Plc’s rating to BBB-(NG), placing it on Rating Watch.

02 Dec 2015 In Rating Notifications

GCR downgrades Skye Bank Plc’s rating to BBB-(NG), placing it on Rating Watch.

Lagos Nigeria, 30 November 2015—Global Credit Ratings has today downgraded the national scale long term and short term ratings assigned to Skye Bank Plc to BBB-(NG) and A3(NG) respectively, with the outlook accorded as Rating Watch. The ratings are valid until June 2016.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Skye Bank Plc (“Skye Bank” or “the bank”) based on the following key criteria:

In August 2015, during its annual rating review, GCR downgraded Skye Bank’s short term rating by 1 notch to A2(NG) and accorded an ‘Evolving’ outlook to the ratings. This rating action and outlook reflected GCR’s view on the declines in capital adequacy and the liquidity position of the bank, following the acquisition of Mainstreet Bank Limited in December 2014. Also, subsequent declines in the regulatory liquidity ratio in the post year-end period, reduced the bank’s creditworthiness in the short term, and resulted in the rating being subject to variability. However, the rating accorded considered management’s intention to imminently raise up to N30bn in additional Tier 1 capital (during 2015).

However, subsequent developments have adversely impacted on Skye Bank’s ability to raise additional equity capital to-date. Consequently, the bank’s capital adequacy ratio is just close to regulatory minimum levels. In addition, declining liquidity as well as higher concentration risk within Skye Bank itself, have increased the risk inherent in the bank’s financial profile. The above mentioned factors, on which additional detail is provided in the paragraphs below, have combined to reduce Skye Bank’s resilience to further negative developments, necessitating the downgrade of the long-term rating by 3 notches to BBB-(NG). Nevertheless, GCR acknowledges that management continues to expend significant effort on maintaining key ratios within regulatory norms, and also working towards capital raising. These efforts have been duly considered in the accorded ratings.

In regard to capital, the challenging operating conditions within the Nigerian economy and the banking sector in particular, has resulted in the bank being unable to raise N30bn of Tier 1 capital within the timeline stipulated in its short term strategic plans. Consequently, Skye Bank’s capital adequacy ratio declined since the time of the previous rating. Capital raising efforts have been further impacted by a fine of N4bn (which is about 3% of Tier 1 capital) imposed on the bank by Central Bank of Nigeria (“CBN”) for non-compliance with its directive on remittance of Federal agencies and parastatals’ funds to the treasury single account. The effect of this fine would appear to have impacted on investor confidence in the bank, leading to a sharp decline in its share price. While management disputes the legitimacy of the fine, the uncertainty in this regard may affect the recapitalisation efforts in the short term.

Furthermore, note is taken of the progressive decline in Skye Bank’s liquidity position, as its liquid and trading assets/total short-term funding ratio weakened from 35.8% at FYE14 to 31.5% in 1H F15 and 30.1% in 3Q F15 (FYE13: 46.8%). Although the bank’s statutory liquidity ratio of 30.8% at mid-November 2015 meets the required minimum (of 30%) at present, the absence of a significant buffer heightens Skye Bank’s susceptibility to liquidity risk. The current level is also well below the industry’s average.

 

Liquidity ratios (%) Dec. F13 Dec. F14 Jun F15 Sept. F15
Liquid and trading assets / Short term funding 46.8 35.8 31.5 30.1
Liquid and trading assets / Total assets 38.2 28.8 20.5 16.5

 

Another major concern for GCR is the increased concentration in the bank’s advances book. As at 30 September the single largest exposure amounted to 29% of eligible Tier 1 capital (22.5% of total eligible capital), with the 5 largest advances constituting over 125% of eligible Tier 1 capital The oil and gas sector (which is currently experiencing significant challenges given the low oil price environment) constituted a significant 29.9% of the advances portfolio. The potential need for additional provisions on non-performing loans could put further pressure on the already weak capital adequacy position. Note was also taken of the fact that most of the exposures to the oil and gas sector may have been restructured, in the light of the difficult operating condition of the obligors.

Factors which continue to support the accordance of a BBB-band rating include of Skye Bank’s strategically important status and the implied likelihood of state support (if necessary). Also, CBN’s recent publication on the sound status of commercial banks, provides additional comfort. GCR will continue to monitor the bank’s performance, especially in the above mentioned key areas of concern. The ratings may be positively impacted by favourable resolution of the CBN fine, together with increases in the bank’s capitalisation, liquidity and evidence of long-term asset quality stability. The rating may face additional negative pressure if regulatory capital or liquidity ratios are breached, or if significant additional evidence of asset quality deterioration becomes evident. In terms of the ‘Rating Watch’ outlook, the rating will be reviewed within the next 6 months.

 

NATIONAL SCALE RATINGS HISTORY

Initial rating (March 2008)

Long term: A(NG); Short term: A1(NG)

Outlook: Stable

Last rating (August 2015)

Long term: A-(NG); Short term: A2(NG)

Outlook: Evolving

ANALYTICAL CONTACTS

Primary Analyst

Funmilayo Ojatunwase

.(JavaScript must be enabled to view this email address)

+234 1 462 2545

Committee Chairperson

Dave King

.(JavaScript must be enabled to view this email address)

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Criteria for rating Banks and Other Financial Institutions, updated March 2015

Skye Bank rating reports (2008-15)

Glossary of Terms/Ratios, February 2015

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The ratings were solicited by, or on behalf of, Skye Bank Plc, and therefore, GCR has been compensated for the provision of the ratings.

Skye Bank Plc participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of info received was considered adequate and has been independently verified where possible.

The credit ratings above were disclosed to Skye Bank Plc with no contestation of/changes to the ratings.

The information received from Skye Bank Plc and other reliable third parties to accord the credit rating included the unaudited accounts as at 30 September 2015, capital adequacy ratio computation and liquidity position as at October and November 2015, respectively.

 

 

 

 

 

 

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