Is Sterling Bank Plc under any jinx to remain on treadmill perpetually ? From its inception as a product of the banking consolidation, the bank, an amalgam of some weaklings saved from extinction by the regulatory authorities, has continued to be uninspiring .The takeover of the distressed Equatorial Trust Bank by it did not help its case . Till today , the inability of its successive leaders to turn it around and to create better competitive values has continued to raise serious concerns among its stakeholders.
CRITICAL SUCCESS FACTORS IN BANKING
A strong company’s performance is rated not only by delivering values to its stakeholders but by its ability to outperform its rivals in such areas considered as the critical success factors ; it is not by mere its survival .Critical success factors (CSFs) are factors that are essential to the strategic success of a business entity ; and according to Johnson and Scholes , they are those components of strategy in which the organization must excel to out-perform competition.
Naturally ,in banking, management is coterminous with risk management, a critical success factor that separates the men from the boys . In managing the risks ,a bank has to satisfy five main constituencies. One is the surplus units from which it borrows .These units demand the best possible term in rates of interest and maturity structures and the maximum liquidity to enable them to have the funds back when they want them , or as agreed ; the second constituency is the deficit units which borrow from the banks . They want to borrow when they need the funds and as cheaply as possible .Like the lenders ,the borrowers also impose the obligation of maximum liquidity on the banks to enable them to obtain funds when they need them .
In addition to satisfying the surplus and the deficit sectors ,the shareholders must also be satisfied .These require maximum or adequate returns on their investments in order to remain invested in the bank and to be willing to continue to provide additional resources and when needed .
To the above critical success factor is added the fourth constituency , the regulatory authorities ,whose interest is to ensure that the bank does not undertake excessive risks and that it operates prudently and within stipulated regulatory requirements .
There is , finally the community at large. As the provider of the environment within which it operates . the bank owes an obligation to the community to be a good corporate citizen, capable of maximizing the exploitation of the opportunities available and minimizing the threats in the environment .
Apart from risk management, another critical success factor in banking is cost optimization. That is why world-class corporate leaders in the banking industry aspire not only to lend better than their rivals profitably and safely but operating efficiently and effectively. .
STERLING BANK AND CSFs
The survival of organizations and the success of strategies are influenced by the ability of every corporate leadership to respond to the competing pressures from the business environment , to come up with appropriate and strong strategic capability and to live up the challenges of the cultural and political context . These three pressures create motives for pursuing some strategies and not others :environment-based motives – fitting new strategies to a changing business environment ; capability-based motives – stretching and exploiting the resources and competences of an organization as well as expectations-based motives – meeting the expectations created by the cultural and political context.
However, while Sterling Bank has been able to perform those responsibilities highlighted above ,it has only been able to do so at threshold or survival level.; its leadership has failed to excel or outperform rivals in such areas particularly valued by certain customer groups or stakeholders ,particularly risk management ,cost optimization and innovation restricted it to the treadmill .
COST TO INCOME RATIO
This observation is true .When its performance is juxtaposed with its rivals particularly among Tier 2 banks, Sterling Bank remains the least efficient bank. It is still the worst tier 2 bank in Nigeria after Wema Bank for a smart investor targeting better and competitive value for money, It only delivered one of the most miserable results in that financial year of 2023 , at least relatively to its rivals
Inability to excel in those areas has led to its unimpressive and noncompetitive values delivery to its shareholders and inability to grow . But its unfortunate fate may not be farfetched. First ,the environment is tough and dynamic but the leaders of Sterling Bank has been unable douse the fire created intensives competition and the ever-changing industry environment to exploit the available opportunities because it lacks unique resources and core competencies to excel and outperform rivals ; and consequently, it has failed to live up to the expectations of its stakeholders.
UNINSPIRING VALUES TO INVESTORS
Its unfortunate performance or weaker industry position may not ,however, be clear to the unsuspecting investors or observers . To these naive observers , its year on year financial results are nothing but fantastic despite incremental nature . They look at the growth recorded , though leathergic ,in some of its financial indicators yearly relative to the previous year to come arrive at this judgment.
A look into the bank’s profitability scorecards in the last few years confirms the above observation. Between 2017 and 2021 , its profit after income tax rose from N7.95b ,N9.47b ,N10.16b ,N11.11b to N13.40b; Profit after tax stood at N21.60bn in 2023 from N19.3b in 2022 . It declared N16.3bn PAT in H1 2024 unaudited Results compared to N10.7 in the corresponding period of 2023
But while the above declarations may be true to some extent , it is absolutely disingenuous to claim that the bank’s performance is inspiring ; it is merely a ruse .The issue is that, while some naive investors focused on historical data to assess the performance of Sterling Bank , smart investors look beyond bench marking the performance of an organization in relation to previous years in order to identify any significant changes and to form their opinions on the health of any organization.
They know the danger in it : it could lead to complacency on the part of the management. Moreover, it is the rate of improvement compared with that of competitors that is important. They know some valuable insights about performance standards could be gleaned by looking at the comparative perspective with other organisations in the same industry or sector .
NET PROFIT MARGIN
The reason may not be far to seek .Sterling Bank net profit margin , a metric that helps investors assess if a company’s management is generating enough profit from its revenues and whether operating costs and overhead costs are being contained., follows a similar diminutive trend . In the 2023 financial year, all its management could only convert every N100 made at the top line to N9.70k , the worst among the tier 2 banks in Nigeria. More precisely, it achieved 9.7% as its net profit margin . That is what it means when its total revenue of N221,77b is analyzed relative to its net profit of N21.58b.
Between 2017 and 2023 it ranged from 9.5%, 8.2% ,7% ,6% 6 %, 11% and 9.7% respectively indicating the bank is converting less than 10% of every N1.00 revenue made at the top line to profit except in 2022 when it recorded 11percent .Companies that can expand their net margins over time are generally rewarded with share price growth as share price growth is typically highly correlated with earnings growth. Sterling Bank has failed to do this and the consequence is its diminutive share price growth and market value.s
STERLING Stock Market Performance
| 1WK | 4WK | 3MO |
|---|---|---|
| -1.23% | -7.19% |
| 6MO | 1YR | YTD |
|---|---|---|
| -19.8% | +8.11% | -6.76% |
STERLINGNG closed its last trading day (Wednesday, September 18, 2024) at 4.00 NGN per share on the Nigerian Stock Exchange (NGX), recording a 0.3% gain over its previous closing price of 3.99 NGN. Sterling began the year with a share price of 4.29 NGN but has since lost 6.76% off that price valuation, ranking it 120th on the NGX in terms of year-to-date performance.
On the face value one might be tempted to score the management of Sterling Bank high for increases recorded in its profitability metric, however, this is still unimpressive in an absolute term relative to its peers ; it has remained and sustained a back seat position as the least profitable tier 2 bank .
Moreover , according to a ranking of banks on the weighted bank strength index by Proshare , an influential financial firm ,Sterling Bank recorded the lowest score of 23 and the highest and the worst non performing ratio of 7% in 2021 while its cost to income settled at 75% , the third worst figure among its peers
Deeper and critical interpretations of these metrics ,particularly its profitability metric, give uninspiring pictures. Looking at this bank profit from its earnings to the investors or earnings per share [EPS] confirms an observation that the bank needs a better top management to fulfil its destiny or to exploit its full potentials.
EPS
A good way to determine earnings to the investor is the Earning Per Share (EPS), which is the monetary share value, i.e., what every share issued by the bank will receive from declared earnings. The higher the EPS, the more profitable the bank is. Full Year EPS for Sterling Bank in the last five years comes to about 0.31k ,0.36k ,0.18k,0.28k an d 0.32k per share; in the first quarter of 2022 it is 12k compared to 8k in the corresponding period of 2021. When the prevailing high of inflation is factored into the values given to its investors by EPS, this is nothing but miserable return to investors.75k 67kEarning per share in Kobo (Basic/Diluted) 75k 67k 52k 39k 37k
ROA
From the perspective of its assets contribution to its profitability or how efficiently it uses the assets its owns to generate profits , the same message of lethargic profitability is communicated by the bottom line . For every N1.00 naira in assets owned by Sterling Bank , they earn 0.82 ,0.86 ,0.89 ,0.86 and 0.83 between 2017 and 2021 . This poor scenario could be linked to the impressive rise in its assets without a simultaneous impressive rise in its top line .These ratios indicate less impressive asset turnover as the bank generated less than one naira for every one naira asset employed and thereby depicting an inefficient optimization of its available assts .
ROE
Its ratio of return on Equity which suggests a company’s ability to return profits to its shareholders is speaking the same language ranging between 8.9 % ,9.0%,,9.4% ,8.9 %,8.3% and 9.6 % from 2017 to 2021 .The indication of the above trend is that for every naira invested in Sterling Bank its investors would earn less than 10 percent as their return per share .RoE,a ratio that holds the highest importance for any shareholder , is an indication of how well a company uses its shareholder’s funds. Analysts believe the returns may not serve as a signal for investors to go long riding on hidden-value opportunities.
Operating income 140,205 (14,712) 7,519 132,500 14,895
Operating expenses (105,177) 393 (4,694) (99,097) (1,779)
Loan/ Deposit Ratio 56.25% 54.10%
liquidity Ratio 32.41% 37.22%Total Operating Income 140,205 63.2% 117,089 66.9% 19.7%Total expenses (105,177) -47.4% (87,210) -49.8% 20.6%
Cost to Income Ratio
Net Interest Margin
Non performing loan ratio
DIVIDEND PAYOUT
And the blame for this is put on the door step of its successive leaders at the driver seat of the bank that failed to discover the right joker for a much needed turnaround .Sterling Bank has not been lucky to have a CEO with strong zeal or ambition of the early 90s. During that period powers swiftly changed hands among few top players as the Nigerian banking sphere came under strong competitive dynamics ; behind this change were the few new generation banks ceos with brilliant visions and breathtaking guts. Among them were the likes of Fola Adeola ,Guaranty Trust Bank ;Jim Ovia ,Zenith Bank and few others .In a bid to displace some old banks ,the architect of this change, indeed, slugged it out with the old timers which had dominated the Nigeria bank sphere for many decades in a fierce battle for the industry leadership .They strategically turned themselves the industry rebels and firebrands ;these unorthodox challengers, refused to be dilettantes or merely intellectually curious. . With these attributes, they suddenly changed the leadership equations in the banking industry
To turn the table around to their advantage they adopted a robust business model, considered to be very difficult for their competitors to replicate. They operate a low cost, revenue efficient model that relies less on manpower but more on prudent risk asset allocation while attracting cheap deposits. .
No leader of Sterling Bank has displayed this .Even the current leadership under Mr. Abubakar Suleiman has proved to be another run of the mill ;he is yet to prove he could make the difference .Suleiman has been Managing Director and Chief Executive Officer of Sterling Bank Plc since April 01, 2018 ; before this he had served as Executive Director of Finance & Strategy before he was promoted to this position . Under his watch the bank remains the least profitable bank among its peers and the worst by asset quality as its 2021 financial reports show .Sterling Bank share price return of 2.5% decline under performed the banking industry which returned 0.6 % and the market which returned 15.8% over the past year.
For this lacuna, it has remained nothing but a laggard ;its leaders seem to prefer to be complacent as their watchword than becoming an industry challenger; they are content to follow than rewriting the rules of the game; afraid of orthodoxy and more inclined to cut than build
Though adjudged to be sound by the regulatory authorities, this brand ,no doubt , needs a turnaround. What the management of Sterling Bank does mostly is to play catch up strategy by embarking restructuring and reengineering ;however while this necessary analysts believe this would not turn any company a leader ;a company must be capable of fundamentally re-conceiving itself, of regenerating its core strategies and of reinventing its industry . The absence of this only leads to its inability to deliver competitive values to its investors relative to its peers . And this ugly trend is depicted and exposed by its relative diminutive profit margins, earnings per share, dividend per share, return on equity and assets as well as market values when compared to its rivals
INEFFICIENT PROFIT MACHINE
Where is the management of Sterling Bank getting it wrong? .The problem with this bank is not resources but resourcefulness; its capability to create competitive values relative to its tier 2 lenders rivals is nothing but inadequate ; for a better value creation , the bank’s management needs to be more resourceful ; .its current management needs to wake up from its slumber . There is no doubt about its strategic move to grow the bank. Between 2017 and 2021, it grew its assets by 52% to N1.63trillion from N1.07 trillion and its equity capital by 39% to N141.49b from N101.64b. However , an impressive growth in assets and equity is expected to add values; though it added values but not adequately or competitively . But this is not case with Sterling Bank . Sequel to this , analysts believe, the problem with Sterling Bank is not the size of its resources but inefficient profit machine. This is usually the case when activities or processes that critically underpin an organization competitive advantage are absent.
To put the blame on the door step of Sterling Bank’s leadership may not be farfetched. Bigness without stretch and leverage is obesity, smallness without stretch and leverage is impotence. Moreover, facts abound about many companies that overcame seemingly insuperable resource; it all depends on the quality of leadership
This could be situated on the prevailing strategic challenges of the 21st century ranging from rapid changes, need to foster and integrate knowledge and exploitation of modern communication technologies and forces of globalization
. Moreover , from its conception as a product of banking consolidation it had failed to garner enough momentum due to its inability to tame the above forces Furthermore ,the bank has not been lucky to have a strategic leader that could turn around the entity consummated from the weak constituent entities that came together under the umbrella of Sterling Bank into a strong and competitive brand. The issue is that the foundation of its past had already shaken and fractured due to changes in the external environment. This changing external environment and other competing pressures , which are expected to shape an organization strategic choices , are expected to be countered by effective strategic capability particularly with internal resources and competencies. But when the industrial terrain changes shape faster than the top management could refashion its basic beliefs and assumptions as in Sterling Bank ,the negative effects are serious competitive problems ; it has been confronted with a task of resolving certain competitive problems ranging from stagnant growth, declining margins to falling market share which have remained its nightmares
To overcome the above challenges and effectively compete , a company needs to adjust its internal strengths to the environmental opportunities ;its managers need to identify, combine, re-combine, and manage their resources, competencies and capability to explore their potential and perform better than the competitors . In a nutshell , the advantage of an organization consists in identification of the internal core competences, mainly based on knowledge assets and intellectual capital, that align with the key success factors of the market and give competitive advantage, better performance and better market position. No doubt , Sterling leadership has continued to make certain frantic efforts in the above direction. But the success of a strategy depends whether it addresses the circumstances in which the organization is operating and whether an organization has the resources and competencies to deliver a strategy
For now ,there is no evidence that the bank’s leadership is endowed with the above initiatives, or one can say its strategies failed to generate the expected results . From all indications its competence to grow its revenue and convert it efficiently into competitive profits and values for its investors remain elusive. These two weaknesses have made difficult its ability to make adequate or maximum returns for their shareholders a tug of war .
Specifically ,a major headache of Sterling Bank is its inability to control its costs and convert its revenue to profit competitively. Within the broad profitability constraints of every industry or market segment a firm’s actual profitability is determined by its relative cost and differentiation advantages .Sterling Bank has been unlucky not to have a resourceful leadership ;where a leadership lacks capability or core competencies in critical areas , it may not only be unable to control costs but to make enough or competitive income.
Between 2017 and 2021 , its profit after tax jumped by 68.5% to N13.52b from N8.02b. However ,while its 68.5 % profit growth is impressive ,it is equally deceptive when viewed from the absolute term and relative to its rivals among tier 2 lenders . The major drawback is its management inability to control its operating costs . Its operating cost handles have always been sharply northward ; in fact, what better exposes the chink in the armour of the top management of Sterling Bank is its weak cost control .This manifests in the bank’s cost to income ratio ,a measure of the costs of running a company in relation to its operating income . Between 2014 and 2017 this metric was above 70% ; in 2018 and 2019 it was above 80% while in2020 and 2021 it hit 75%, the worst after Wema and Union Bank; the higher this ratio, the greater the risk of zero profitability. .From this scenario, it could be observed that the bank is getting less than a quarter of its operating income converted to profit before taxation .
Sterling inability to grow its income competitively is another bane of its brilliant performance. In the last five financial years , its gross earnings grew merely by 6.6% to N142.2b from N133.49b; the lethargic growth in its gross earnings could be situated partly on its management uninspiring income from the core banking segment ,due mainly from its inability to lend profitably and safely .The main challenge before every player in the industry remains the operating environment which has been highly deleterious; banks are confronted with low interest rate debacle and digital disruption that is responsible for low-growth of revenue. Both of these remain big challenges that are difficult to combat for many players including Sterling Bank in the last few years . In the face of lower interest rate environment, banks could only survive and grow their earnings with cautious loan growth, capital preservation, benign funding cost, asset quality improvement, lower provisioning, and resilience in non-interest revenue (NIR . For Sterling Bank, these challenges have remained a hard nut as only players with iron teeth could do this successfully .
Analysis of Sterling Bank’s performance in some critical market segments indicates it has not been performing impressively particularly in its lending business .The reason behind this may not be far to seek . For a bank to do well in this segment it needs to posses core competencies in risk management and specifically win interest and credit rate battles to ensure competitive net interest margins and to minimize burden of nonperforming loans to the core banking income segment . To capture the quality of performance of any bank and its leadership , the best perspective is to beam a searchlight on its risk management or lending business .The reason for this may not be far to seek . No doubt , bank management is coterminous with risk management and only those with strong intellectual energy and robust experience could lend profitably and safely . A major challenge here is managing the risk of mismatches between assets and liabilities and between borrowing and lending rates. No doubt , this is herculean and has sent many banks out of the circulation .Not only that ,another big challenge is to put in place a robust fund transfer pricing ,a method used by bankers to evaluate the profitability of deposits and loans .Overall , the battle in the core banking income segment, where the mega bulk is delivered ,revolves around interest rate and credit risk management .
It is equally expected to get much from the non interest income which is transaction volume driven . But this is not so . In both interest income and non interest income segments the performances have been lethargic .Sterling Bank inability to perform competitively in the major income segments have continued to affect its move to change its status to an industry leader .The implications of this ugly trend are depicted by its miserable profit margins, earnings per share, dividend per share, return on equity and assets as well as market values illustrated above.
A detailed analysis of its market segments and its ability to wring out better values from them shed better lights on the pedigree of its leadership. In the core banking market segment, Sterling Bank performance still remains less inspiring going by its feeble net interest margins and the high volume of its bad and delinquent loans which had drawn its backward in the last few years ,if not from its conception. This is as it continues to grapple with the challenge of competing in a harsh environment particularly low interest rate environment and other regulatory hiccups. Between 2017 and 2021 its net interest margins ranged to 8.06% 6.05%, 6.73% 6.23%and 6.60% ; in the first quarter of the ongoing financial year it hits 7.7% from 7.4% in 2021. This means that for every N100 of invested assets (loans to bank customers) Sterling Bank made less than N8 of income after all interest expenses had been paid. By this we can say this bank did not make impressive investment decisions between the period under review as it generated only a little above 8 percent return as its best return
.
As regards the credit risk battle , though its non performing loan ratio is one of the industry best in the first quarter of 2022 , as at 2021 its non performing loan ratio was 7% , a very high figure if not the worst in the industry . To get to its new status in 2022 , it was not until after it cleaned up its books , digging a trench for bad and delinquent loans ;a process that started in the last few years . The negative impact of this exercise, however, is visible on its diminutive bottom line and capital erosion .
LEADERSHIP STRATEGIC QUALITY
The whole palaver about Sterling Bank could be situated on leadership strategic quality . The survival and success of an organization are influenced by its ability to respond to the competing pressures which is its capability to adapt new strategies to a changing business environment , to stretch and exploit the competencies of an organization and to meet expectations created the regulatory and governance framework ,powerful stakeholders ,ethical considerations and culture .However , where unimpressive strategic choice or inability to strategically position a bank against the changing external environment and leverage internal resources with relevant core competencies is the order of the day ,no impressive results may be generated; also , where the race to competition is not perceived as a race to build competencies but simply to gain immediate market share, this is nothing but dangerous .Sterling Bank’s leadership failure to respond appropriately to the competing pressures is its critical handicap
This task could not be arrested and dismantled by a dilettante. To arrest these competitive problems only a bank management with foresight and intellectual leadership to imagine a new opportunity arena, to actively shape the emergence of that future industry structure to its own advantage and competitively to grow its market share and market position with fairly well defined parameters of value ,price, cost and service could avert the above competitive problems .
Such foresight and intellectual leadership is necessary to gain deeper understanding than competitors of the trends and discontinuities ranging from technological, demographic to regulatory, or lifestyle that could be used to transform industry boundaries and create new competitive space ; such endowments will also allow it to be prescient about the size and shape of tomorrow opportunities and helps it to conceive fundamentally new type of customer benefits, or to conceive radically new ways of delivering existing customers benefits .
Also , to combat those competitive problems a management is expected to be well armed with capability to foreshorten migration path or to influence the direction of industry development .By this , it would have been endowed with the ability to accumulate necessary competencies ,to test and prove out alternate product and service concepts, to attract coalition partners who have critical complementary resources, to construct whatever product or service delivery infrastructure may be required , and get agreement around standards ,if necessary. .All these will be deployed to grow its market share and market position with fairly well defined parameters of value ,price, cost and service
However , the absence of a leadership with the above sterling qualities in Sterling bank is a cause for concern and a major killer of a strong profitability momentum .Sequel to these limitations whenever this bank is buffeted by above forces it is usually rendered helpless regarding the control of its destiny .Ultimately ,with a discrepancy between the change in the pace of industry environment and pace of change in its internal environment , Sterling Bank has no option but to be forced to embark on the daunting task of restructuring , an exercise variously tagged downsizing ,overhead reduction, employee empowerment, process redesign or portfolio rationalisation; to sustain its profitability . More often , its executives usually has to pick up the knife and embark on the brutal work of restructuring with a goal is to carve away layers of corporate fat ,jettison underperforming businesses and raise the asset productivity. Analysts believe ,this emergency surgery is to avert loosing their jobs and cooling the frayed nerves of its investors with incremental profitability . This is the fate and the style Sterling Bank has adopted to survive and to sustain its diminutive profitability in the last few years . However, while those initiatives are important, they cannot restore a company to industry leadership ,nor ensure it to intercept the future .
The consequence is clear . Up till today , everything about this bank is pointing to attitudes of a laggard .Both the past and the current leaderships of Sterling Bank appear to be more interested in protecting the past than creating the future ,take industry structure as a given and seldom challenge the prevailing conventions. The impacts of the above leadership errors have rendered Sterling Bank backward and made the weakling among the tier 2 lenders at least when viewed from some critical performance metrics perspectives. . But the fact remains that only a leadership that is ready to spend less time worrying about how to position the firm in existing competitive space and more time creating fundamentally new competitive space could turn the table ; a leader who could make commitments to particular skill areas far ahead or in advance of the emergence of specific end product markets . Such commitments are usually made by managers or leaders with foresight who are capable of imagining products, services and the entire industries that did not yet exist and then give them a birth .;a leader that perceives the race to competition as a race to build competencies not simply to gain immediate market share
The current uninspiring competitive status of Sterling Bank could be situated on its current leadership .The painful upheavals in this bank in the recent years reflect the failure of onetime leaders to keep up with the accelerating pace of industry change. This ,indeed, is confirmation of a conventional wisdom that a company should better be run by leaders not managers ,by architects , not maintenance engineers to avoid the above debacle
This is not to say Sterling is unhealthy but less competitive . Naturally , every corporate entity in banking business has to satisfy five main constituencies which include the surplus units from which it borrows ,deficit units which borrow from it, the shareholders who own the business , the regulatory authorities that monitor and caution it from taking dangerous risks and the community at large where it operates . In performing these activities each bank watches its cost and revenue handles to deliver competitive profit and better returns to its investors . Sterling Bank, no doubt ,satisfies all those five constituencies; it gives loans to the deficit units, borrows from the surplus units or depositors , makes profit for its shareholders, takes risks within regulatory limits and satisfies the community at large as a responsible corporate citizen . Most importantly, it ensures its liquidity is not in doubt to remain a going concern
