Is Sterling Bank Plc under any jinx ? From its inception as a product of the banking consolidation, this bank, an amalgam of some weaklings saved from extinction by the regulatory authorities, has continued to display uninspiring and lethargic performance . It has remained on the treadmill perpetually as a glorified community bank .
Even, 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; and it seems no hope yet to shake this toga off .
Hiding Under Disingenuous Yardsticks To Survive.
One observation on the embarrassing fate of Sterling Bank is its management desire to hide under a disingenuous yardstick to measure its progress to give the impression that all is well with the bank to its stakeholders.
But one .. of the critical features of a smart investors is consciousness for good and appropriate benchmarking standards for measuring success or progress of an organization.
There are three different bses for benchmarking of performance standards :.improvements on historical performancel, industry (sector) norms /standards and best in class which is beyond the industry in which an organisation currently operates. Of all the above standards , best in class is the feature that every investor prefers as the first two are fraught with potential dangers .
Managers are not oblivious of the strengths and weaknesses of each measuring standards. They give out what will be protect and promote their selfish interests of projecting their companies good image and ignorant and gullible investors are contented with that are projected to them yearly ..
Some investors of Sterling Bank are still operating within this frame of mind .Despite its less inspiring performance of Sterling Bank over the past few decades, the most unfortunate thing is that its miserable performance or weaker industry position relative to its peers is not clear yet to some unsuspecting investors or observers.;they are rather fixated with historical data which its management keeps flaunting year on year basis to sell the brand to its stakeholders. .
This clearly manifests in its profit figures over the past few years . For instance ,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 ,a financial year when virtually every bank delivered superfluous profit ,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 . To some investors , with the above profitability scenario, the bank is making progress.
But the above narratives could only excite a naive observer or investor . Not everyone is gullible to be comfortable with incremental and leathergic growth of Sterling Bank over the years . The fact remains that yearly financial indicators relative to the previous year are nothing but disingenuous yardsticks
Serious stakeholders measure the progress and corporate performances of corporate entities holistically .They measure their progress relative to their rivals in the industry. .Analysts believed a scorecard by historical data is a ruse when it is not complemented with comparative analysis to determine the corporate position of an organisation’s health . The argument may not be disputable .Truly, when the above figures are compared with its peers and best in class players in the industry , Sterling Bank performance over the years have remained highly uninspiring.
Sequel to this , 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 could be gleaned by looking at the comparative perspective with other organisations in the same industry or sector as well as when an organisation is compared with the industry best in class .
Those insights are better reflected in some critical success factors or product and service features particularly valued by some groups of stakeholders. Smart investors measure corporate performance by looking at some critical success factors relative to the sector average and industry best in class.
The reason for this may not be farfetched. An organisation’s strategic capability is a relative issue since it concerns the ability to meet and beat the performance of competitors. Sequel to this managers must understand performance standards.
STERLING BANK AND CRITICAL SUCCESS FACTORS : A Merely Treadmill Player
A strong company’s performance is rated not only by delivering threshold 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 according to Johnson and Scholes , are those components of strategy in which the organization must excel to out-perform competition.
To acihieve superior performance an organisation needs unique resources that critically underpin competitive advantage and that others cannot imitate or obtain – a long-established brand, for example. It is, however, more likely that an organisation achieves competitive advantage because it has dis- tinctive, or core, competences.
For a bank or any other economic agent to be considered competitive , it is expected to be delivering better values for money than its competitors in certain areas regarded as critical factors in its industry. But this has remained a tall ambition for the leadership of Sterling Bank .
Naturally , 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 .
Finally , satisfying the community at large is also critical. As the provider of the environment within which it operates , a 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 .
The issues highlighted above are considered the critical success factors (CSFs) in banking. They are the product features that are particularly valued by a group of customers and, therefore, where the organization must excel to out-perform competition
However , different stakeholders may value any of the above product/service features to a greater or lesser degree .Consequently, from the potential providers’ viewpoint it is valuable to understand which features are of particular importance to a group of customers (market segment) that are known as the critical success factors.
Truly, Sterling Bank is surviving and living up to its stakeholders expectations on the above issues considered as critical success factors in banking .However, it has remained a threshold bank for decades .
The bank’s leadership inability to competitively grow its resources and deploy even the available ones to generate core competencies in critical areas , particularly to lend safely and profitably in the manner that could deliver superior values to its stakeholders, remains its critical handicap for a long time that hunted it for years . This laxity is worrying and the whole blame is on its weak leadership with its inability to generate competitive values to its shareholders.
This is palpably reflected in its miserable net interest margin, net profit margin, extremely high cost to income ratio and non performing loan ratio,all of which have led to its inability to deliver impressive value to its stakeholders.
More specifically, its share price that has failed to cross over to the medium from its small price category for decades, its uninspiring payout dividend and dividend yield are all sources of serious concerns to its stakeholders. A detailed analysis of the weak points or values delivered by the bank in the last few decades shed more light on the havoc wrecked on its existing investors, a situation that discourages some other potential investors.
UNINSPIRING DIVIDEND TO INVESTORS.
. A dividend is a reward paid to the shareholders for an investment in a company, and it usually is paid out of the company’s net profits ; a steady track record of paying dividends makes stocks more attractive to investors.
But the uninspiring dividend and capital gain available to the Sterling Bank stock investors is the most oblivious stigma that put off serious investors. .
Dividend history at Glance
2023 15k
2022 10k
2021 05k
2020 03k
2019 —-06k
2016 09 k
0 .2k
2014 25k
2013 20k
2012 20k
The pain of its shareholders could have been ameliorated and they would forgiven the bank for its miserable dividend if the company’s stock price is growing rapidly . But this is not case .
NET PROFIT MARGIN
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., remains diminutive.
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. In other words , t achieved 9.7% as its net profit margin .
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 . That is one of the reasons it can’t grow it share price convincingly . 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.
Diminutive Share Price and Market Value.
Failure of Sterling Bank to deliver good dividend or capial gain due to its miserable net profit margin has led to its diminutive share price growth and market value .
Sterling Bank stock has remained a small-price stock for lack of impressive fundamentals to drive it to the medium price stock category .
Rule 15.29 of the Rulebook of The Exchange, 2015 (Dealing Members’ Rules) notes that equities priced above N5 per share for at least four of the most recent six months of trading, or new security listings priced above N5 per share at the time of listing on NGX are Classified as medium price stock.
But Sterling Bank Plc has not traded above the N5.00 mark level and remained above the N5 mark up consistently for four months to be qualified for medium price stock .Therefore, it could not be reclassified from small-price stock to medium-price stock as it happened to FidelityBank last year ,.
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. However, it 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.
The question remains:, is this price fair? One of the most popular valuation metrics that determines an answer to the above question is the price-to-earnings ratio (P/E), which measures the share price of a stock as a multiple of its earnings. The closer this figure is to one or below one, the cheaper the stock. Using Sterling current share price of N3.99 and its trailing twelve months earnings per share (EPS) of N0.94 , the stock has a P/E ratio of 4.5x. This is below the banking sector average of 7.4 x.This lower P/E ratio suggests that the stock is undervalued compared to its peers, indicating that investors are paying less for each unit of earnings relative to other banks.This could be seen as an opportunity for investors if they believe that Sterling earnings will continue to grow.
But the problem with this bank is that its fundamentals are not saying the same thing , so investors may not be inspired to pay more in anticipation for better capital gain or dividend .
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 from 2019 to 2023 comes to about 75k in 2023 from 67k in 2022 to 52k in 2021 ,39k in 2020 from 37k in 2019 . When the prevailing high of inflation is factored into the values given to its investors as mirrored by its EPS, this is nothing but miserable return to investors.
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 value is communicated by the bottom line . For every N1.00 naira in assets owned by Sterling Bank , they earn 0.82k ,0.86k ,0.89k ,0.86k and 0.83k between 2017 and 2021 .In 2022 , it stood at N1 and went down to 0.85 in 2023 financial year.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 assets .
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 . In 2022 it rose to 12.5% but came down to 11.8 in 2023 . 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 above returns may not serve as a signal for investors eyeing hidden-value opportunities
Non performing loan ratio.
In the financial year 2013 , the bank, it would appear, had to reach deep into its maturity transformation mandate to improve interest income in the period under review .In absolute sense the loan increased by 19 % while investment securities increased by 33.6%
However ,when it concerns loans to total assets the bank could be seen to be more cautious with less of the total assets allocated to loan in 2023 compared to 2022 ;the bank’s loan deposit ratio, also fell to 54.10% percent from 56.25% percent. The bank as indicated from those scenarios is risk shy . The implication of this is that less interest income and consequently lower contribution from its loan assets compared to the preceding year to the bottom line.
Its Group’s balance sheet grew by 36.2% year-on-year to N2.5 trillion in 2023 (FY 2022: N1.9 trillion) against the backdrop of a 38.8% rise in customers deposits to N1.8 trillion from N1.3 trillion in 2022 . This had a significant contribution of 72.8% to its funding base
Its Loans and advances rose N895,822, 21.4% higher than a sum of N737,735 in 2022 . However , the amount allocated to loans from the total assets at 35percent in 2023 was lower than 39.7% of the totall assets in 2022 . In other words, greater portion of the total assets was allocated to loans in 2022 than 2023 though its loan was greater in absolute tern in 2023 than 2022 .Also, its Investment securities at N485,952 was slightly reduced to 19.2% of the total assets in 2023 compared to N363,673 19.6% of the total assets in 2022 .However in absolute sense the loan increased by 19 % while investment securities increased by 33.6% in 2023 than 2022 . Though ,its non-performing loans ratio is within the minimum 5 percent regulatory requirement , this quality is after years of loan write -off and expense of generating higher interest income and growing its profitability.
COST OF RISK
Also, the bank’s risk management framework did not show that the cost of risk is reduced . This was because its impairment charges increased by 35 % to N12.34b billion in 2023 , compared to N9.12 b in 2022 , indicating the bank’s less impressive asset quality.
The inability of the leadership of Sterling Bank to acquire unique resources or core competencies in the above critical success factors highlighted above and to respond to the competing pressures from the business environment remains its critical handicap. .
The overall impact of the above laxity has kept its deposit from the customers and the loan s to the customers less competitive while its capability to lend safely and profitably and satisfying the community at large is largely at the threshold level. Consequently , this has led to its unimpressive and less competitive values delivery to its shareholders and its inability to grow the bank . The environment has been tough and dynamic but the leaders of Sterling Bank has been unable douse the fire created intensive competition and the ever-changing industry environment 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.
The blame for the above ugly scenario 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 The issue is that 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 . 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 .
Its leadership inability to turn the bank around for better value delivery could be pinned down to inefficient profit machine, poor risk management and power of industry foresight as well as lack of robust fund transfer pricing ,a method used by bankers to evaluate the profitability of deposits and loans. .
INEFFICIENT PROFIT MACHINE.
The problem with this bank is both resources and resourcefulness. First , the bank’s management has not demonstrated the capability turn around its resource base and to grow the bank . There is no doubt about its strategic move to grow the bank with assets increasing annually,but it is rather too lethargic, keeping it on treadmill and limiting its muscles to compete . Its total assets and shareholders funds remain the least after Wema Bank.
Growing resources and making them unique are critical to outperform in any industry as strategic capability is underpinned by resources available since it is the resources that are deployed into activities of an organization to create competencies.
But the more painful thing with Sterling Bank leadership is its inability to deploy even the available resources in the manner that could generate core competencies in a critical area of cost optimization .
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. This poor identity has become its recurring decimals .In 2023 financial year, It also delivered one of the most miserable results, at least relatively to its rivals with its cost to income ratio as a major cause .It cost to income ratio inched up slightly 75% in 2023 from 74.5% in 2022
That is why some analysts believe, the problem with Sterling Bank is not the size of its resources but inefficient profit machine. This argument may not be farfetched. Bigness without stretch and leverage is obesity, smallness without stretch and leverage is impotence.
The banks leadership should be blamed for both inadequacies. After all , facts abound about many companies that overcame seemingly insuperable resource to achieve global leadership ; it all depends on the quality of leadership
RISK MANAGEMENT
Bank management is coterminous with risk management. In other words ,it is no more than managing risks—the risk of mismatches between assets and liabilities and between borrowing and lending rates . Sequel to this , all the technical training a banker receives is heavily geared towards lending .When it is said that one is a good or an astute banker ,what ,in fact , is meant is that one is a shrewd lender . –one who lends money safely and profitably.
Indeed ,risk taking ,which is fundamental nature of banking has remained unchanged and this is inherent in the maturity transformation, another fundamental feature of banking . Similarly ,while other sources exist ,the main source of income and profitability of banking remains the spread or the difference between the rates at which the funds are borrowed and the rate at which they are invested or loaned out .
In the 2023 financial year , interest rates remained elevated and many banks exploited this to grow their exponentially . But Sterling Bank was boxed to a corner as its interest expenses moved at a faster pace than interest income . Interest expense hit N72.7 billion at 39.7 % (FY 2022: N52.0 billion) with interest paid on customers’ deposits, other borrowings and cash from other banks accounting for 55.2%, 41.3% and 3.5%, respectively. However , interest income grew by 21.5% year-on-year to N156.1 billion (FY 2022: N128.4 billion) with interest receipts on loan & advances to customers, investment securities and cash constituting 78.3%, 19.8% and 1.9%, respectively.
Unambitious Leadership
Another critical drawback on Sterling Bank progress and competitiveness is its lack of ambitious leadership with strong foresight like Fola Adeola, Elumelu ,Jim Ovia ,among few others with the capability to change the rules of the engagement . . Company’s strategic choices , or the options for strategy in terms of both the directions in which strategy might move and the methods by which strategy might be pursued , measure the quality of a corporate leadership. Every organisation has a range of strategic directions open to it: it could diversify into new products; enter new international markets; or transform its existing products and markets through radical innovation. These various directions could be pursued by different methods: the organisation could acquire a business already active in the product or market area; it could form alliances with relevant organisations that might help its new strategy; or it could try to pursue its strategies on its own. But not every corporate leader is equipped to do these with dexterity like those mentioned above’ ‘None of .the Sterling Bank has displayed this capability ‘
Only those leaders that are strongly armed with power of foresight together with the power to execute it could gain for their companies the much needed intellectual leadership in terms of influence over the direction and shape of industry transformation.. In fact, lack of leadership with this has denied Sterling Bank’s managers answer three critical questions regarding what new types of customer benefit it should seek to provide in the future, what new competencies it will need to build or acquire to offer those benefits to customers and how it will need to reconfigure the customer interface over the next several years
Sequel to this ,some analysts believed Sterling Bank is in dire need of an architect as it leader who must also be capable of producing a blueprint for how to turn the dream into reality , not only a maintenance engineer ; an architect driven by high powered strategic intent. Their views may not be farfetched. First, building a strategic architecture may point the way to the future, it’s an ambitious and compelling strategic intent that provides the emotional and intellectual energy for the journey. Moreover , strategic architecture is the brain; strategic intent is the heart To transform Sterling Bank , a leader with a strong capability for stretch and the creativity it engenders, the engine and fuel for corporate growth and vitality is needed .
For this ,the bank’s strategy process must be a purposefully created misfit between where the firm is and where it wants to be. Ultimately, such a leader must find a way to close the gap between resources and aspirations that strategic intent opens up. This could be done by leveraging resources, traveling the maximum distance down the road to leadership, using the least possible amount of fuel , a goal that is to challenge its managers to become more ingenious both in multiplying the impact of the firm’s resource base and enlarging it.
