Sterling Bank, too slow to compete

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Tier two banks were badly beaten by the recession and ensuing economic challenges in the country. They typically have higher non-performing loans and lower Capital Adequacy Ratios (CARs) due to riskier lending practices. Here, we look at Sterling Bank Plc and its prospects going forward.

Sterling Bank’s results for the 9 months ended September 2017 show that gross earnings increased from ₦79.7 billion in 2016 to ₦94.6 billion in 2017. Earnings per share increased slightly from ₦0.20 in 2016 to ₦0.21 in 2017.

Steps in a new direction?

Sterling, earlier this year, announced that its current Managing Director, Yemi Adeola, will retire at the end of this month. His successor, Abubakar Suleiman, has also been named. He comes with a background in non-interest banking, a segment which Adeola had signified that the bank would be getting a stand-alone license for.

Data from the bank’s investor presentation for the 9 months ended September 2017 show that non-interest income comprised a greater proportion of the bank’s earnings compared to 2016.

Electronic banking

Banks have largely pivoted towards electronic and USSD banking in a bid to capture a younger generation who do not have the patience to spend hours in banking halls. E-banking is also far cheaper compared to the costs of maintaining physical branches.

Sterling also stated that it would enhance revenue from its digital and electronic banking. Mobile and USSD banking grew 174% year on year. Internet banking adoption also grew 96% year on year.

Fx exposure to oil sector is quite heavy

While the bank has reduced its loans to the oil and gas sector slightly, it holds a large amount of these exposures in dollars. This leaves the bank vulnerable in the event of a sharp depreciation in the naira.

Delay in making essential moves

The bank’s Capital Adequacy Ratio (CAR) was at 11.39% which is above the regulatory threshold of 10%. Sterling Bank’s ₦110 billion share capital is largely comprised of a share premium of ₦42.7 billion. The bank, in an investor presentation released for its Q3 2017 results last year, stated it was on track to raising ₦35 billion in tier 2 capital sometime this year, but has not shed more light on its plans.

Other tier two banks have all unveiled various strategies to boost their capital base. Diamond has sold non-essential subsidiaries. Union bank raised N50 billion through a rights issue and is considering raising more funds through a Eurobond.  FCMB is also reportedly considering a Eurobond. Unity bank is reportedly in talks with Milost Global, a private equity, firm for a potential take-over. Stanbic Ibtc gave investors the option of receiving shares in lieu of dividend payments.

Those seeking to raise Eurobonds are doing so in order to take advantage of current interest rates, which could be hiked sometime in the near future. Approaching elections in the country mean that foreign investors would price bonds raised by Nigerian banks much higher.

Valuation

Sterling bank closed at ₦1.80 in today’s trading session, down 4.3%.  Year to date, the stock is up 66% and the bank is currently trading at about 9.4 times earnings. Indicating the stock is currently trading at a high multiple.

Several analyst reports suggest the bank could be restricted to paying 30% of its profits due to revised guidelines by the CBN.

Despite the increase in non-interest income, Sterling’s delay in raising the much-needed capital, and dollar exposure to the oil sector makes the stock a cautious buy at most. Nearly all banks are looking towards electronic and mobile banking income.

Sterling Bank Plc, (formerly known as NAL Bank Plc) was the pioneer merchant bank in Nigeria. It was established on 25 November 1960, as a private limited liability company, and was converted to a public limited liability company in April 1992.

Sterling Bank Plc (the “Bank”) together with its subsidiaries (collectively the “Group”) is engaged in commercial banking with an emphasis on retail and consumer banking, trade services, corporate, investment and non-interest banking activities.

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