Pulling weight as systematically important bank
Just like the demise of Lehman Brothers in the heat of the 2008 financial crisis engendered the Systematically Important Financial Institution (SIFI) theory in the United States, the Central Bank of Nigeria’s intervention to salvage the banking system in 2008, orchestrated the equivalent in Nigeria. The tottering financial system, the CBN said, depended on the SIFI banks as it pronounced them ‘too big to fail.
These financial institutions are First Bank of Nigeria, United Bank for Africa, Zenith Bank, Access Bank, Ecobank Nigeria, Guaranty Trust Bank, Skye Bank and Diamond Bank. The term ‘too big to fail’, again, borrowed from the U.S. Federal Reserve Bank (Fed) came to be an alternate designation of the SIFI banks. Too big to fail, according to former Fed Chairman, Ben Bernanke, is a firm “whose size, complexity, interconnectedness, and critical functions are such that, should the firm go unexpectedly into liquidation, the rest of the financial system and the economy would face severe adverse consequences.”
To be so classified by the apex bank, the banks, which made up three quarters of the Banking system at the time in terms of earnings, profitability, assets, customer deposits and branch networks, a bank had to meet four excruciating criteria approximating the proverbial needle in a haystack, namely, size, interconnectedness, substitutability and complexity.
The CBN classification, by regulatory fiat, which is a strong basis for competition, at once, constitutes the SIFI banks into a strategic group that must, by default, compete along those lines drawn out by the CBN, the most clear-cut (measurable) of which is size.
A strategic group is a concept used in strategic management that groups companies within an industry that have similar business models or similar combinations of strategies. Size is defined by total assets wielded by the banks at the time of the CBN’s pronouncement; interconnectedness, meant interbank exposures and volumes of other intra-industry assets and liabilities; substitutability, was defined by ease with which the institution can be replaced as a financial services provider; and complexity, meant how difficult it would be to liquidate the institution.
But being a SIFI comes with enormous responsibility and for Skye Bank, it is the responsibility of ensuring rope-tight compliance to regulatory requirements, creating environment for best practice to thrive and playing a leading role in protecting the financial system, which includes a teeming number of depositors and investment savvy shareholders.
It is worthy of note that once pronounced a SIFI, the CBN trains a searchlight on a bank’s books and activities at a level several notches higher than what obtained prior to the designation. “The CBN, it was learnt, has therefore adopted a more robust regulatory regime to monitor and scrutinise the eight banks, in order to ensure that they are healthy,” said one source.
That Skye Bank has consistently scaled this scrutiny speaks of the lender’s commitment to ensure transparency and accountability in its transactions. It is also a hint of good corporate governance culture, which has been carefully nurtured over the years. But perhaps the best testament of the bank’s total commitment to the Nigeria project is that of living up to the SIFI name by acquiring Mainstreet Bank, a move considered a masterstroke that in one breath protects depositors’ money, ensures better customer service and creates more value to shareholders.
Considered a power move by analysts for the sheer size of the acquisition (N126 billion), it can only mean a heightened sense of security for the 1.9 million depositors of Mainstreet Bank- their savings are protected. The combined entity would be nurturing a customer base of over five million.
The deposit protection cuts across all regions of the country tracing the spread the acquisition confers on the Bank. Depositors’ and indeed customer penetration has been deepened in the South East and South-South regions where it was less represented pre acquisition. The sheer size of the assets of the combined entity, according to one analyst ensures depositors funds are well shielded from erosion.
Skye Bank’s current shareholders, retail and institutional, seemed headed for a good deal with the Mainstreet Bank purchase, it immediately situates their investment in the centre of banking in the country as a tier one bank with capacity to enter big ticket transactions across the ever growing Nigerian economy.
Their Return on Assets (ROA) and Return on Equity (ROE) are certain to trace a northward movement against a backdrop of economy wide retrogression. Already, the bank’s stock price is beginning to shift upwards at a very quick pace. It is one of the fastest growing stock among the SIFI stocks on the Nigerian Stock Exchange (NSE), growing at an incredible 15.9 percent between February 16 and March 6, 2015.
The quick footed nature of the stock is testament to the potential locked up in the stock for value investors who are patient to keep the stock. The fast paced movement in the stock price is at the back the setback of a negative portfolio outflow in January when over N700 billion in portfolio investments flowed out of the capital market.
A near tragedy for which the NSE helmsman, Oscar Oyenma recited an ode: “Bearish sentiments prevailed for most of the year as foreign investors steadily withdrew from the Nigerian market due to currency risk and the recovery of developed economies, and the effects of the U.S. Federal Reserve tapering of its quantitative easing policy.” It was in the news last week that the Bank’s stocks were the safest to put money-in in the Week ended February 27 for the very low volatility of the stock price. Volatility is the frequency of gaining and losing money on a stock.
Another plus for a bigger Skye Bank that comes with the acquisition is the capacity to do more business and strengthening of the maturity transformation ability of the bank. This ability is sorely needed in a frontier market like Nigeria where SMEs and Big business alike need financing and thus unleash the multiplier effect long touted by economists as the major driver of growth for economies.
China and other emerging economies of the BRICS (Brazil, Russia, India, China and South Africa) are testament to this fact. The new size further puts the bank in a position where it can support the new CBN initiative of financial inclusion. Financial inclusion is the provision of a broad range of high quality financial products and services such as savings, insurance, payment and pensions, which are relevant and affordable for the citizens of a country, particularly those in the low income segment of the population.
CBN recently has restated its commitment to reducing financial exclusion rates from 46.3 per cent in 2011 to 20 per cent by the year 2020. The immediate implication of this is that by the year 2020 80 per cent of the population would have affordable and unhindered access to financial products and services such as savings, insurance and payment and pensions, amongst others.
This pans out well with Skye Bank’s refocusing agenda, which targets the retail and commercial sectors projected to grow into an army of 160 million spenders by 2030, according to McKinsey, a global management consulting group. Another estimate say that segment is worth N177 billion. In the words of the bank’s top official:
“The acquisition will avail Skye Bank many benefits, including cost leadership, business optimisation and greater ability to offer business convenience to its teeming retail and commercial customers, with a combined branch network of over 450, across all the states of the federation.” Effectively, the Skye Bank is saying, the alternative to pulling your weight as a big player in the sector, nay the SIFI strategic group, is implosion.