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STERLING BANK: On The Treadmill For Long

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 Is the  management  of Sterling Bank led by its  Chief Executive Officer, CEO, Abubakar Suleiman, still in control of its future or asleep at the switch? This is just one of the questions perturbing both existing and potentials  investors of this bank .This question may not be farfetched.    Shareholders are one of the five major constituencies it serves . Every bank is expected to satisfy them by providing maximum  or adequate return on their investments in order for them to remain invested in the bank and to be willing to continue to provide additional resources as and when needed.   However, Sterling bank’s weak fundamentals  have kept its stock under performing for long just its dividend yields have been miserable .  .

The bank’s stock epitomizes traits of a  laggard in the Nigerian Stock market. Moreover,  one thing that raises concerns around the brand is the endless hopelessness  surrounding the management’s ability to turn it around .   How long will this brand stay on threshold trying to keep one step ahead of the steadily declining margins and profits of yesterday businesses? The   is the  puzzle  around this brand. 

In the past three months, its share price swings up and down like  spirit more frequently than three quarters  of the entire stocks in  the market. The share price of Sterling Bank Plc is low while its  slow recovery is another high point  that put off investors .  Asides its little potential for capital gains, the greater tragedy is that  it rarely pays  dividends and when it pays it is miserable amount . This is the agony of its investors

.Low returns and earnings power as well as its high level of non cash earnings, its  usual  trademarks, continue to give  its investors sleepless nights. As indicated above , one of the traits that put off investors  is its high level of non cash earnings, as its reported profit usually   are not backed up by cash which  it has reported  . Moreover, according to the latest share price  analytical reports , the bank is more volatile than 75 percent of the entire stocks over the past three months .Although, its weekly  volatility at 10 percent by standard deviation has been stable in the past year ,it is still higher than 75 percent of the entire stocks in the market ; that makes it more risky . Its 1.5 percent negative  return under performed both the industry and the market at 12percent and 22.4 percent returns  respectively over the past  year ; at its 3.7 percent return per year in the past five years  return  equally under performed the industry at 35percent .    Its unimpressive performance, may be linked to poor   price earnings  ratio   [ 5.4x]  which is believed to be high relative to its earnings compared   to the industry’s  price earnings ratio  [  3.4x ]. Although  ,the bank is good value compared to the market with a PE of   8.3x , the bank share , however , is   selling at a discount to its book value at 0.4x .

Sterling Bank’s current net profit margins of 12.9 percent  is quite miserable  and one of the factors that distracts investors attention from its stock and keeps its price low and volatile .Moreover, its Return on Equity at 8.2 percent and Return on Assets ,ROA 0.8 are both abysmally low to attract investors good attention and drive its stock price impressively .Return on average equity (post-tax) declined to 8.8% in H1 2020 from 11% recorded in H1 2019. The highest return on average equity of 12.5% was recorded in H1 2015 while the lowest return on average equity of 8.5% was recorded in H1 2017  Return on average assets (post-tax) declined to 0.9% in H1 2020 from 1.1% recorded in H1 2019. The highest return on average assets of 1.5% was recorded in H1 2015 while its lowest return on average assets of 0.9% was recorded in H1 2020

 

  Sterling Bank’s stock traded on Monday, November 30, 2020 at 1.94 NGN per share on the Nigerian Stock Exchange . It   began the year with a share price of N1.99 but has since lost 2.51% off that price valuation, ranking it 106th on the NSE in terms of year-to-date performance.  At 1.94, it is  -26.79% below its 52-week high of 2.65, set on Nov 13, 2020..  The following trading day ,December,01, 2020, its share price collapsed again to  N1.90k or  0.04 percent . 

At that price its one day return was 2.06 percent down  and its one year return was 7.32 percent down .   With outstanding shares of well over 28,790 billion ,  Sterling Bank’s  Earning Per Share    in 2019   was N0.38  while its  Price Earning Ratio  was  2.85. Its dividend yield, was 1.98 percent ;  its dividend per share  at  3k  in 2019 amounted   to 8 percent dividend  payout .And in 2018 ,its dividend  was 2k . In 2017 ,the bank declared a dividend of 2 kobo for every share of 50 kobo  .The bank’s dividend nosedived since  2015 .  That year   pay the bank paid  9k dividend per share ., Mr Adeola  , the then  CEO  of the bank , said the bank was driven by the need to save more to boost the shareholder funds capacity and also regain more capital considering the regulatory requirement on capital adequacy, under the Basel II and III accords.

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The above less impressive runs leave  investors wit little or no capital gains or dividend  .The weakling pace of the bank stock, as is the case with most quoted stocks, is indicative of a market wide apathy for capital market assets. It is also a pointer to the fact that the economy is depressed and the propensity to save (which approximates the propensity to save), is rather weak.  .    But more than any other factor, it is an indication that Investors are not too impressed with the bank’s showing in the past few years  with unimpressive earning power and valuation .       

 9 Months , 2020 : HEAD HARDLY ABOVE THE WATER

The ongoing financial year 2020 ,without any doubt, is stormy .The COVID-19 pandemic put a lot of pressure on Nigeria’s banking sector in  both Q2 and Q3 2020, with the sector shrugging off its lethargy in Q3 as the economy restarted after three months of partial lock down imposed by the federal and state governments which led to restrictions in business activities and movement.

 However, for  Sterling  Bank Plc , the impacts are more disastrous as  its  barely raised its head  above the water level.

Despite the modest growth in Net Interest Income, in the first quarter, 2020, its pre-tax profit declined significantly, down 32% y/y to N2.2bn in Q1 2020, due to weaker Net Fee and Commission Income (-16% y/y) and weak operating efficiency, given the increase in OPEX (up 8% y/y) compared to the increase in Operating Income (up 3% y/y).

Q1,2020

In the first half year, regulatory mandates also directly worsened commercial bank’s ability to generate substantial non-interest income (fees and commission) in the short run. CBN’s new bank charges which took off on January 1, 2020, saw card maintenance fees and electronic transfer fees reviewed downwards.

Q2,2020

The above policy in the case of Sterling Bank, the impact is mammoth, evidenced in the disparity between the N4.1billion derived in Q2 of 2019 and N2.4 billion obtained in Q2 of 2020. The spirit of these legislations are to ensure a more structured and stronger institution, but their negative impacts on cash flow for these commercial banks cannot be overplayed.

Sterling Bank made N5.4 billion in profit for the Half-year 2020. This falls shy of the N5.7 billion posted in the corresponding period of 2019.

Sterling bank recorded a significant increase in its impairment charges in H1 2020, impairment charges increased by +165.8% from N2.43bn recorded in H1 2019 to N6.46bn recorded in H1 2020. The Group also recorded a significant increase in impairment charges in Q2 2020, from N1.19bn recorded in Q1 2020 to N5.27bn recorded in Q2 2020.  

The cost-to-income ratio (CIR) declined to 72.6% in H1 2020 from 80.3% recorded in H1 2019, this was driven by a marginal Y-o-Y decline in operating expense of and a -0.11% Y-o-Y increase in +9.04% operating income. The decline recorded in operating expense was achieved despite growth in expenses of the Group including AMCON and insurance fees.This cost to income ratio is still high among the worst in the industry

Q3,2020

In the third quarter 2020 ,its gross earnings declined marginally  .Sterling Bank Plc reported gross earnings of N106 .07 billion in 2020 9M compared to N109.66 billion same period in 2019 – a decline of 3.28%. while its profit before tax climbed by 4.9 percent  to N8billion from N7.7billion  .But its post tax profit backtracked .

  But the  bank’s Chief Executive Officer, CEO, Abubakar Suleiman, was still enthusiastic. “Our performance reflects the positive results of strategic decisions and investments in our focus areas as we continued to record significant improvement in both funding and operational costs. Overall, we delivered a 7.2% increase in operating income and a profit after tax of N7.37 billion despite prevailing uncertainties around the COVID-19 pandemic ,he declared ”

 Why was the   bank’s Chief Executive Officer, beating his chest as though the bank was Covid 19  proof ; the bank still  suffered its injury  at the bottom line    ; while its pre tax  took a leap ,its net profit could not survive it as it ended up in negative outlook.   Its  net profit could not escape the  scalpel. It was down marginally by 2.8 percent from N7,579b to N7.367 b.

A detailed of the bank’s nine months book ended in September 30th ,2020 revealed how the bank battled the deleterious clime aided by covid 19 pandemic .  To achieve the above ,Sterling Bank Plc recorded  a massive increase in  revenues from two of its earnings-generating units – trading income and other operating income.Net trading income increased  to N7.05 billion   by 264.72 percent year on year  from N1.9 billion in 2019 while other operating income increased by 23.89 percent year on year  to N2.46 billion   from N1 .98b . Operating Expenses ,OPEX, declined by 3.3% as  it moderated administrative expenses despite growth in other balance sheet linked expenses, including AMCON charge and deposit insurance premium.The 3.3 percent decline in total expenses amounted    N1.69b in conjunction  with the massive increase from the trading income resulted in the reported increased in the pre tax profit . During  this  time, this led to the fall in its cost to income ratio from 81.4 percent to 73.4

However , spoilers were on the prowl too during period under review. The bank in its efforts to minimize the  impacts of highly credit  risky terrain slightly brought down its loan portfolio by 1.3 percent from 618.7 b in 2019 third quarter to N610.8 billion  in  the corresponding period  of 2020 . But the core banking income segment became a hard rock difficult to squeeze water from . Interest income declined  by 6.7 percent to N88.69  year on year basis fromN95.08b .  Although interest income declined by 6.7% as yields trended lower, a 17.0% reduction in interest expense enabled a 120 bps drop in cost of funds and a 100 bps increase in net interest margin.Though the cost of  fund declined from 6. 3percent to 5.1 percent,  decline  in the yield on earning assets that was marginal  from 14.6 percent to 13.2 percent saved the bank as it maintained a positive net interest income.  This led to an increase in its net interest margin from 7.0 percent to 8.0 percent in the third quarter of 2020 . But in response to the pandemic and expected credit losses,  the bank  said it  proactively increased  its  cost of risk by 100 bps to 1.9% while recording a marginal increase in NPL ratio to 2.9%.

However,  as from the beginning of the year, net fee and commission income was one of the biggest spoilers it came down heavily to N7.86b from N10.66b ,a 26.2 percent drop within the period year on year basis .   This was occasioned by the downward review of electronic banking fees and slower loan origination due to the protracted lock down.The negative impacts on the bottom line were   moderated by a 264.7% spike in trading incomes

 However , the  final spoiler was the income tax expense which skyrocketed to N665m from72m in September 2019 bringing down its net profit to N7,37 billion from N7..55b .

Despite this , its earnings per share and    return on  assets  remained flat at 26k and 0.8 percent respectively . However, its post tax return on Average Equity was down marginally to 8.0 percent from 8.2 percent while pre tax return on average equity rose to 8.7 percent from 8.3 percent .  

The bank’s financial position also remained on treadmill too with its relevant metrics  above the industry thresholds  .Although its liquidity fell to 32.5 percent from 40 percent it was above 30 percent regulatory threshold . The bank’s assets to equity ratio is  believed to be moderate at 10.3x  indicating  the bank  debt  relative to its equity in financing its operations is not excessive. Moreover, the bank’s liabilities that  are made up of  83 percent primarily  low risk sources  of funding , its   loans to assets ratio of 47 percent  and loans to deposit ratio of 63 percent  are all appropriate . Meanwhile,  financial    analysts are not comfortable with the bank’s low provision for bad loans 93 percent and high level of its bad loans and the management inability to turn the bank for dramatic and greater earnings  

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