Sterling Bank Plc: better ways to profitability imperative

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By Folakemi Emem-Akpan

Introduction

Sterling Bank was able to hold its ground in 2015 despite Nigeria’s economic recession; and turned out a decent profit. Shareholders got a dividend reward for their investments.

However, the 2016 financial year will be one in which Sterling Bank will strive to re-engineer itself and fashion out better ways to be profitable. With nine months already gone out of the 2016 FY, profitability levels appear low. Having missed a lot of the targets it set for itself for the 2015 financial year, the bank is still underperforming its potential and might end 2016 with a lower profit than it did in 2015.

This is not exactly good news for its shareholders. While the bank sought to keep investor loyalty by increasing level of dividend paid in 2015 (over 2014), it might not be able to continue in this direction in 2016 without overreaching itself.

There is however a bit of good news for a potential investor. The bank’s shares, currently being sold on the floor of the Nigerian Stock Exchange (NSE) are at present underpriced. The investor that is prepared to wait for capital gain and appreciation might want to buy in now.

Core operations

Customers patronised most Nigerian banks in terms of loans and advances for the 2015 financial year. Sterling Bank was one of the few exemptions with clients patronizing the bank a little less in this aspect.  The bank’s loan portfolio decreased by 8.8 per cent to N338.7 billion. Despite this, average lending rate increased over the preceding year’s, as did its average deposit interest rate. So while it provided services to its lenders at a higher finance cost, it also paid its depositors a better interest.

Net interest margin, the true test of a bank’s effectiveness in its core banking operations of lending and borrowing, decreased to 47.7 per cent in 2015 from 55.1 per cent in 2014. This result did not compete favourable against other banks’ results for the same period.

The bank’s gross earnings (which comprises interest income and other fees and commissions) increased to N110.2 billion. The gross earnings was a 6.6 per cent improvement over the preceding year’s N103.4 billion level, and was brought about by the bank’s higher ‘other operating income’ such as fees and commissions.

Pre-tax profit increased by 2.8 per cent to N11 billion during the course of the year while profit after tax improved by 14.4 per cent to N10.3 billion.

Despite the better turnover and profit, earnings per share was unpredictably lower than that of the prior year, closing at 36 kobo, as compared with 42 kobo the year before. Dividend per share however improved to 9 kobo in 2015 from 6 kobo in 2014.

Profitability ratios

Sterling Bank’s profitability ratios were almost at the same level they were in the preceding year. These levels are still high enough to give a sense of the bank’s efficiency in the management of assets and cultivation of profit.

Profit margin was 10 per cent, meaning that for every N100 earned by the bank in the course of the year, N10.00 made it to the profit position.

Assets deployed earned slightly more in 2015 than it did in 2014. Return on assets (ROA) for the year stood at 1.4 per cent in 2015, compared with 1.3 per cent in 2014.

Return on equity for the year was 10.8 per cent. Analysis shows that for every N100 equity deployed, the bank made an after-tax profit of N10.80, compared with the N10.60 made in 2014.

Other ratios

The proportion of the bank’s loans classified as non-performing in the course of the year was 4.8 per cent, higher than 3.1 per cent in 201. While high and therefore worse for the company, this ratio is still at an acceptable industry level. Many other banks also had higher and worse proportion of classified loans during the year.

In terms of capital adequacy, Sterling Bank performed better in 2015 than it did in 2014, as its result for the year was higher than the preceding year’s. Its equity (a company’s primary and cheapest source of funding) could finance about 28.2 per cent of the loans and advances it gave out to borrowers, up from 22.8 per cent recorded in the erstwhile year.

Having a debt to equity ratio of 7.4 shows that the bank is using N7.40 of liabilities in addition to each N1.00 of stockholders equity. In other words, the bank is using N8.40 of total capital for every N1.00 of equity capital.

Sustainable growth

For the review year, the company had a profit of N10.3 billion, and it retained 75 per cent of it. Asset turnover for the year was 0.14 times while assets/equity was 8.4 times.

In 2015, the bank’s actual growth (growth of income), at 6.6 per cent, was a little below its sustainable growth (8.6 per cent), suggesting that the company grew below its growth ceiling. Simply put, it did not achieve its inherent capacity for growth.

This was in contrast to the prior year, when at 12.8 per cent, actual growth was higher than sustainable growth (10.2 per cent), indicative of a company operating at a higher level than its latent possibilities.

Stock value

In a little more than a year, the Sterling Bank stock has lost more than half of its price, it traded at 76 kobo as at December 30, 2016. This is one of the lower priced stocks in the banking sub-sector of the NSE, and our analysis shows that the stock is currently undervalued. The reasons are not farfetched.

P/E ratio on as at December 30, 2016 was 2.0 while earnings yield was 0.5. Also, net assets per share was N3.32, much higher than the current market price of 76 kobo as at analysis date.

Moreover, the company’s market price is less than it is worth on paper as at now, considering its lower market value as compared with its book value. This is not a common occurrence, especially among banking stocks, and this is quite favourable to the prospective investor.

While the market value was N20.7 billion, the book value stood at a much higher N95.6 billion.

For the would be investor who can be patient, the low share price presents an opportunity for a buy in.

Unaudited results

The Sterling Bank’s third quarter result for 2016 shows both top line and bottom line decline, with revenue decreasing by 2.6 per cent, and pre-tax profit declining by as much as 26.5 per cent. Profit margin for the period was lower, but the bank managed to improve in terms of its core banking operations.

Earning per share was 19 kobo, less than 26 kobo for the corresponding period in 2015. As it stands, it might be hard for the bank to attain in its 2016 financial results the level of gross earnings and profit it recorded in 2015. This will most likely have an adverse effect on shareholders’ returns.

Unique strategies

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 Corporate Social Responsibility initiative designed to provide quick cash through the social media space.

Conclusion

Investors can still expect a dividend from their holdings, but perhaps not as high as that of 2015.

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