Sterling Bank Plc: Better profitability

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Introduction

Our analysis of Sterling Bank Plc’s newly released 2017 results shows that it enjoyed an acceptable level of profitability during the course of the year. It was able to step up the level of its core banking operations, and generally recorded better profitability ratios than it did in the erstwhile years.

With a profit for the year that was higher than that of the prior year, the bank was able to pay shareholders dividend this year, unlike in the preceding year.

 

Core operations

The 2017 FY was a good one for Sterling Bank. It was not only able to expand its core banking operations during the course of the year, it also succeeded in stepping up its non-core banking businesses. It therefore had a collectively higher gross earnings of N133.5 billion in 2017, 19.8 per cent better than the N111.4 billion recorded in 2016.

The bank recorded a much better pre tax profit in 2017 than it did in 2016, its pre tax profit growing by as much as 43.6 per cent to N8.6 billion from N5.99 billion in the prior year. There was also an after tax profit of N8.5 billion during the course of the review year, as compared with an after tax profit of N5.16 billion in the preceding year, and translating into a growth rate of 64.7 per cent.

Sterling Bank however had a lower interest margin of 45.6 per cent, lower than 56.4 per cent in the prior year, and this was not indicative of efficiency in the core business of lending and borrowing. This lower net interest margin was perpetuated because of a decreasing gap between average lending rate and average interest rate. Average lending rate decreased over the preceding year’s (to 18.4 per cent from 21.2 per cent) while average deposit interest rate on the other hand increased to 8.6 per cent from 7.1 per cent. This means that the bank charged its lenders a lower interest rate, but chose to pay its depositors a higher interest instead.

It is worth noting that during the course of the year, the bank gave out a lower level of loans and advances, and also received less deposits from customers.

The bank then recorded a loss per share of 39, as compared to 15 kobo before. There was no dividend payout as expected.

 

Profitability ratios

The bank recorded mostly positive results in respect to profitability in 2017. With both a higher revenue and profit, the bank was able to record a profit margin that was better than that of 2016. At 6.4 per cent, the bank’s profit margin was better than the profit margin of 5.4 per cent recorded in the prior year. What this means is that for every N100 earned by the bank in the course of the year, there was an equivalent profit of N6.40, as compared to a profit of N5.40 for the year preceding 2017.

The bank was also able to squeeze a little bit more profit from assets, as assets deployed earned the bank 0.8 per cent in 2017, as compared to a return on assets of 0.7 per cent in 2016. This means that the bank had a pre tax profit of 80 kobo for every N100 worth of assets deployed. While this is low when compared with industry standards, it was slightly better than the 70 kobo the bank itself recorded in 2016.

For the 2016 financial year, Sterling Bank deployed equity valued at N102.9 billion and for every N100 equity deployed, the bank made an after-tax profit of N8.30, a progression over the profit of N6.00 made in 2016.

 

Other ratios

The bank had a slightly better capital adequacy standing in 2017 than it did in 2016, meaning that the bank is doing better in its primary business of giving out loans. Sterling Bank’s capital adequacy improved in 2017 to 12.2 per cent, higher than 11.2 per cent in the prior year, but it is still below the 16 per cent rate mandated for Systemically Important Banks.

The bank had a debt to equity ratio of 9.4, meaning that it is using N9.40 of liabilities in addition to each N1.00 of stockholders equity. In other words, the bank is using N10.40 of total capital for every N1.00 of equity capital, higher than the N8.70 it did in the erstwhile year.

For the 2017 financial year, the bank recorded a lower proportion of loans classified as non-performing when compared to the prior year’s. The 6.2 per cent result was lower than the 9.9 per cent result recorded in the preceding year, but still overshot (and was still therefore worse than) the Central Bank’s regulatory threshold of 3.66 per cent.

 

Sustainable growth

Sterling Bank managed to pay its shareholders a dividend of 2 kobo per share in 2017, unlike 2016 when it didn’t pay shareholders any dividend. Retention ratio in 2017 was therefore 0.93, in contrast to the 1 time recorded in the prior year. As previously said, there was a profit margin of 6.4 per cent. Asset turnover was 0.12 times, slightly lower than the 0.13 times recorded in the prior year while asset to equity ratio was 10.42 times, higher than 9.7 times before.

Analysis shows that sustainable growth for 2017 was 7.8 times, meaning that the bank had a 7.8 inherent capacity for growth during the course of the year. Meanwhile, actual growth was 19.8 per cent, and this overshot the sustainable growth rate.

 

Stock value

As at July 20 2018, Sterling Bank’s stock traded at N1.36, and our analysis shows that the stock was undervalued at this price.

As at analysis date, the company had a net assets per share (NAPS) value of N3.57, and this was higher than the N1.36 at which it traded on the floor of the stock exchange. Also, the company had a book value of N102.9 billion and a market capitalisation of N39.2 billion, putting its book value/market cap ratio at more than two. Traditionally, a book to market value ratio greater than one indicates an undervalued stock.

The stock is at the moment low priced enough that it is easily accessible by all kinds of investors.

 

Unique strategies

The bank is a full service national commercial bank in Nigeria. In its over 50 years of operations, Sterling Bank (formerly NAL Bank) has evolved from the nation’s pre-eminent investment banking institution to a fully-fledged commercial bank; after completing a merger with 4 other banks – Indo-Nigeria Merchant Bank, Magnum Trust Bank, NBM Bank and Trust Bank of Africa – as part of the 2006 consolidation of the Nigerian banking industry.

Sterling Bank has a unique approach to doing its banking business. It continues to make available innovative products and services that are lauded. It has a philosophy that it is a one customer bank, meaning that it usually gears its services towards making all customers feel important and well served.

For example, it launched its Bank’s Social Lender Service in 2015, a CSR initiative designed to provide quick cask through the social media space.

 

Conclusion

Our analysis shows that the Sterling Bank stock is a stock that usually pays dividend (apart from 2016), so it is an ideal stock for the investor who is interested in a regular dividend income.

*Source: Sterling Bank’s 2017 financial report

*The Nigerian Stock Exchange

Nbillion 2017 Percentage change 2016 Percentage change 2005 Percentage change 2014
Turnover 133.5 19.8 111.4 1.1 110.2 6.6 103.4
Profit pre tax 8.6 43.6 5.99 -45.5 11 2.8 10.7
After tax profit 8.5 64.7 5.16 -49.9 10.3 14.4 9
Total assets 1072.2 28.5 834.2 4.3 799.5 -3.0 824.5
Equity 102.9 20.1 85.7 -10.4 95.6 12.9 84.7
Liabilities 969.3 29.5 748.5 6.3 703.9 -4.9 739.8
Deposits 695.8 14.3 608.5 3.0 590.9 -9.9 655.9
Loans and advances 598.1 27.7 468.2 38.2 338.7 -8.8 371.2
Kobo
Earnings per share 30 66.7 18 -50.0 36 -14.3 42
Dividend per share 2 0 -100.0 9 50.0 6
Core operations 2017 2016 2015 2014
Turnover growth rate 19.8 1.1 6.6 33.1
Profit growth rate 43.6 -45.5 2.8 25.7
Average lending rate (%) 18.4 21.2 23.9 21.0
Average interest rate 8.6 7.1 7.0 5.3
Net interest margin (%) 45.6 56.4 48.8 55.1
Profitability ratios
Profit margin (%) 6.4 5.4 10.0 10.3
Return on assets (%) 0.8 0.7 1.4 1.3
Return on equity (%) 8.3 6.0 10.8 10.6
Other important ratios
% of classified loans 6.2 9.9 4.8 3.1
Capital adequacy 12.2 11.2 17.5 14.0
Debt to equity ratio 9.4 8.7 7.4 8.7
Actual Vs sustainable growth
Profit margin (%) 6.4 5.4 10.0 10.3
Retention ratio 0.93 1.00 0.75           0.81
Asset turnover (times) 0.12 0.13 0.14 0.13
Assets/Equity (times) 10.42 9.7 8.4 9.7
Sustainable growth 7.8 7.0 8.6 10.2
Actual growth 19.8 1.1               6.6           12.8

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