In light of the huge indebtedness of oil and gas firms and the rising inability of most of the oil firms to meet their debts obligations to the banks, uneasy calm and palpable fear currently pervade the Nigerian financial sector with the recent takeover of Skye Bank Plc by the Central Bank of Nigeria, CBN. Skye Bank’s Chairman, Managing Director and other key management staff were forced to resign, while the Board of the bank was reconstituted by the CBN.
Though the 2015 financial statement of Skye Bank is not available, but its 2014 financials showed that the bank recorded total loans and advances of N651.261 billion in 2014, compared to N549.858 billion in 2013. Out of these loans, N240 billion were being owed by energy firms, compared to N209.076 billion in 2013. Worthy of note are some insider-related loans granted to some directors of the bank. Specifically, two non-executive directors of the bank were significant beneficiaries of the bank’s loans to the energy sector.
According to the 2014 annual report, two energy companies — Newcross Exploration and Production, and Pan Ocean Oil Corporation, linked to Mr. Jason Fadeyi, a Non-Executive Director of the bank owed the bank N8.35 billion and N17.077 billion respectively in 2014, while two other energy companies — PPP Fluid Mechanics Limited, and Integrated Energy, Distribution and Management Company, linked to Mr. Olatunde Ayeni, erstwhile Chairman of the bank, owed the bank N11.17 billion and N9.061 billion respectively.
The bank also recorded off balance-sheet engagements in terms of loans granted to Newcross and PPP Fluids totalling N50 million and N233 million respectively. The fact is that Skye Bank was not alone. Many other banks are also in danger of being taken over by the CBN, and unless they take urgent steps to address their capital and liquidity challenges, they may go the way of Skye Bank. A sizable portion of loans to the energy sector had gone bad due to the volatility in the price of crude oil, a development which had affected the ability of the firms to repay their loans. Most of the loans were taken when crude oil sold for about $100 per barrel, today the commodity is hovering around $49 per barrel after dropping to as low as $30 per barrel over the last couple of months.
Specifically, the CBN had in its Quarterly Statistical Bulletin for the Fourth Quarter, Q4, 2015, released few weeks ago, revealed that oil, gas and power firms owed banks in the country about N3.931 trillion as at the end of December 2015. Giving a breakdown of commercial banks’ sectoral credit allocation, the CBN explained that the downstream, natural gas and crude oil refining segments owed banks up to N2.273 trillion as at year end 2015, slightly higher than the N2.264 trillion recorded in November, while the upstream and oil and gas services sector owed N1.156 trillion against N1.192 trillion month on month.
In the power sector, the banks are owed N340.31 billion by Independent Power Plants, IPPs, and power generation companies, while power transmission and distribution companies owed N162.44 billion against N168.1 billion in the previous month. The Central Bank of Nigeria, CBN, PriceWaterhouse Coopers, PWC, and other analysts had in the wake of the declining crude oil price warned that financial institutions in Nigeria risked erosion of their capital. Also, the financial sector and the economy are at risk of being plunged into another crisis over banks’ exposure to the energy sector.
This prediction appears to have started to come to reality, as majority of the banks are faced with liquidity challenges. Few days ago, it was reported that banks’ borrowings from the CBN’s Standing Lending Facility, SLF, rose by 230.61 per cent to N929.52 billion, while the Standing Deposit Facility, SDF, declined by 61.76 per cent to N227.44 billion during the week, indicating that banks are also withdrawing heavily from their deposits in CBN as the liquidity pressure bites harder.
It was said that banks use the CBN’s SLF to support their liquidity shortfalls and meet trading obligations on short term basis, while keeping excess cash with the apex bank in the SDF also on short term basis. With all these disturbing statistics, Nigerians are concerned about the safety of their deposits and investments in the banking system, and the onus lies on the CBN to assure people that the banks are strong and are insulated from the volatility in the oil sector.
By Michael Eboh