Sterling Bank missed target as economic woes threatened profitability

Sterling Bank missed target as economic woes threatened profitability

Economic dislocation prompted by drop in global price of oil continues to impacting on financial scorecard of deposit money banks in the country. Businesses have been on red alert to probable losses (unfortunately from both demand and supply side - an unusual scenario that have played out so far) and financial institutions are getting more exposed to cold economic activities.

Dislodged economic footing has not been properly addressed. Nigerians are dealing with a president that does not talk and a cabinet with divergent views. Both Minister of Finance and Governor of the CBN are serving political purpose rather than economic.

In 2015, Federal Government which serves as major spending unit of the economic did not spend as much while banks that were expected to support business activities are afraid of the blustery economic cloud. The game is still ongoing till now, as Nigerians hope for things to straighten.

Meanwhile, banks as profit takers, were unable to trigger economic activities in 2015. The operators had factored into their deals; risk of increase credit exposure and they significantly paused and played more at money market and less at capital market. Looking for soft landing is never an issued with the much needed and available liquidity.

The outlook was bad for a country that has no standing economic plan that could have provided guideline to style and risk mathematics of the operators.

Then, 2015 results showed that deposit money banks have reaped, and perhaps continue to reaping the failure of both monetary and fiscal policies authorities. The twist and turns around the foreign exchange market couple with decoupling of the economic activities and fundamentals have already spread into the first quarter of financial year 2016. Wither should the deposit money bank invest?

Year 2015 witnessed series of profit warnings even from the systemic important banks. I mean, the level of banking exposures could not be curtailed. The market feels there are distortions that the Central Bank of Nigeria could not handle without some level of “unintended consequences”. It did happened – and economic activities were abysmally grounded in order to safe Naira.

No analysis will be factual enough without mentioning attitude of individuals and corporate entities to oil. Banks are the guilty one; and they were beaten about it. Their rising non-performing loans and profit draw down could most likely be traced to level of exposure to oil and gas sector.

Sterling Bank in the midst of all these….

In the case of Sterling Bank Plc; the bank pretax profit grew by 2.5%, earned 36 kobo on a share price of N1.73...Financial Year 2015 must have been so threatened to the bank as total assets of the bank dropped by 3% on the back of 7% downward trend recorded in loan and advances.

Its gross earnings moved up at 6%, indicating slower business activities and perhaps plus lower competitive edge to take an extreme position. (But more on declined economic activities as the country that feeds about 180 million people with imported goods came up with FX supply restriction.)

For the bank, high cost of funding affected net flow of funds to support the bank’s earnings as rate at which interest income was below the rate at which interest expenses. Thus, the divergent in rate as well as value negate the movement in net interest income by 8% from 2014 to 2015.

Then, customers that provided low interest source of funding withdraw more than they save, the bank might have met funding gap at higher rate to stay in business.

Impairment provision increased by 10.3% year on year while the loan portion of the customers deposit rose to 69% from 66.9%. It could therefore means that the bank created some bad assets which could have easily happened in a period when there was no economic direction.

Its borrowed funds jerked up significantly at about 30% at the time when both risk assets and cash balances with the CBN were reduced. It means more cash resource was used up which might have necessitated the need to resort to borrowing.

Interestingly, customers’ deposits were reduced by about 10%. That is significant to the bank's operation at the time rivals are aggressively developing retail segment intake.

To be fair, customers’ withdrawals could be the spillover effect derived from slow economic performance and the need to spend that could not be deferred. However, the level of short term take outs could turn to be dangerous. It could have negative hit on cost of funds.

Surprisingly, Sterling bank cost to income ratio went down to 72.2% as against 73.6% previously recorded in 2014. But cost of risk jerk up to 2% from 1.7% as cost of funds berthed at 6.1%.

Eventually, the bank’s net margin got better at 9.3% as against 8.7% in 2014.This was made happened by about 59% reduction is tax liabilities.

It could have been disastrous.... Thus, profit after tax gained momentum by 14.3% while operating expenses dropped by 1.9% at the time average inflation in the country continues its uptrend unabated.

Now; total assets of the bank is at around N800 billion while its equity stake berthed at about N96 billion having increased by about 13% from 2015 position.

Julius Alagbe, Analyst

All errors, mistake and omission are mine.