[REVIEW] Outlook for banking stocks

Earnings reports and performance of banks for the 2014 financial year continue to reflect the difficult conditions in which banks traded. The concluding part of the review continues to show a general slowdown in revenue and dependence on cost saving to defend profit.

Sterling Bank Plc needs a strong growth in profit in 2014 in order to improve earnings and dividend per share. Profit growth slowed down in the third quarter due to loss of profit margin but is nevertheless expected to accelerate at full year. The bank has succeeded in improving profit every year over the preceding four years and that record is expected to be sustained in 2014. It has also maintained a continuing growth in revenue since 2011, which is expected to be maintained in 2014. Its drawback is a sharp increase in operating cost, which eroded profit margin.

Yemi Adeola, the bank’s group managing director/chief executive officer, saved costs in two major areas but an increase in operating cost margin undermined the effort. The cost-income ratio remains high compared to peers, which explains a comparatively low profit margin and one of the lowest returns on assets.

Zenith Bank Plc recovered from a profit decline in 2013 though remained slightly below its 2012 profit high. Its after tax profit grew by 4.3% to N99.45 billion in 2014 against a decline of 8.6% in 2013 and the in 2012 net profit peak of N100.15 billion. Profit growth failed to match the growth of 14.7% in gross earnings, which is due to loss of profit margin.

Profit margin was affected by rising interest expenses, which grew by over 51% against an increase of 15.8% in interest income. This was the major event in the year that prevented the bank from converting revenue into profit. Net profit margin declined from 27.1% in 2013 to 24.6% at the end of 2014.

Peter Amangbo, who took over the headship of the bank in 2014, has ended his first year in office with a profit rebound. This is an indication that he is firing up the bank’s growth engines with the strength of a newcomer. Based on the new growth momentum, he can be expected to move profit to a new peak in the current year.

Diamond Bank Plc is likely to show a slowdown in revenue growth in 2014 compared with a strong growth in the preceding year. That will affect profit performance, which may be a flat growth or a decline from the all time peak of N28.5 billion in 2013. A decline of 7.2% was recorded on pre-tax profit at the end of the third quarter while a drop in tax provision kept after tax profit flat.

The bank was unable to grow profit as rapidly as revenue at the end of the third quarter and two major expenditure lines accounted for this. These are interest expenses, which grew more than two and half times as rapidly as gross income as at the end of the third quarter and operating cost, which rose nearly twice as fast as revenue.

A helpful development recorded was a decline of 12% in impairment charge for credit losses but that was insufficient to defend profit margin. Loss of profit margin from 15.7% in 2013 to 13.3% as at the end of the third quarter is the missing strength in profit performance for Diamond Bank in 2014.

UBA Plc hasn’t got a stable record of profit performance over the preceding five years and the expectation from the 2014 operations is that the seemingly random walk profit records will continue. The bank recorded a profit decline in 2013 and profit again declined year-on-year in the third quarter of 2014. Another profit decline may therefore be expected for UBA in 2014, which will be the fourth profit decline since 2009.

Phillip Oduoza (pictured), the bank’s chief executive officer, faced challenges of rising cost of funds and loss of profit margin in 2014. Revenue performance showed reasonable stability as at third quarter but interest expenses claimed an increased proportion of gross earnings and therefore reduced net profit margin from 17.6% at the end of 2013 to 16.7% at the end of the third quarter. Costs failed to moderate anywhere else on the operating structure, which raised the cost-income ratio and subdued profit growth.

Unity Bank Plc churned out stunning performance ratios with its interim results in 2014. The bank is expected to achieve a significantly improved profit capacity and emerge with a big turnaround at the end of 2014. A strong gain in profit margin was a major event in the bank’s interim reports in 2014.

There was a cost cutting success in respect of operating expenses, which lowered operating cost margin to one of the lowest in the banking industry. A big difference in earnings performance has been made between the preceding year and the 2014 financial year for Unity Bank: costs have moderated and profit margin has improved. Its net profit margin stood among the highest in the banking sector at the end of the third quarter.

Henry James Semenitari, the bank’s new managing director, has built a new strength in earnings for the bank by cutting down on key operating costs and stretching out profit margin. His cost management effort paid off in cutting interest expenses and operating cost.

Union Bank’s earnings expectation for 2014 operations is quite promising with another likely strong growth in profit. After tax profit had exceeded the full year figure for the preceding year by the second quarter. If the profit growth rate seen in the interims is maintained to full year, the bank is expected to report one of the strongest profit advances in the banking sector in the year.

The good profit prospects for the 2014 financial year is despite the challenges of weak revenue growth and increase in operating cost. The bank closed the third quarter with an after tax profit of N8.08 billion, which was 33.1% above the full year profit of N6.07 billion in 2013. After tax profit grew by 53.7% in 2013, a recovery for the second year from a huge loss of N82.55 billion in 2011.

Emeka Emuwa, managing director/chief executive officer of the bank, was engaged recently to replicate in the bank the success story he chronicled in Citibank Nigeria. He is the man to drive the transformation agenda of a bank hungry for rapid recovery and growth. Can he return the bank to glory is the question mark on Union Bank going forward.

Wema Bank Plc has undertaken major turnaround measures in recent years and the earnings outlook for 2014 indicates that the reward of the reform is beginning to come. The bank is showing renewed strength in both revenue and profit performances. Profit rose by more than one-third at the end of the third quarter, which places the bank among the high growth drivers in the banking industry.

Profit margin improved, as the bank seems to have put on a new image of cost efficiency – a cost-income structure rebuilt to permit profitability. Revenue lines were growing and costs moderating as per interim reports, which is a milestone attained by the management led by Mr. Segun Oloketuyi. The bank’s managing director/chief executive officer, is confident that Wema bank now has adequate operating capacity to propel earnings growth.

Skye Bank Plc did two years of recovery and growth before it entered 2014. Two major developments on the bank’s income statement however undermined its growth momentum in 2014.  These are impairment charges, which jumped by 62% in the third quarter and a decline in revenue – both of which led to an increase in the cost-income ratio and consequently loss of profit margin. Other main cost lines are under control, which helped in dealing with the problem of declining revenue. Interest expenses dropped by almost 15% at the end of the third quarter and operating expenses went down marginally.

Timothy Oguntayo, group managing director/chief executive officer of Skye Bank, faces the possibility of reporting a drop in profit in 2014. He is likely to table two main reasons before the shareholders for this. The major one is revenue weakness, which persisted for the second year in 2014 after a slight decline in 2013. The second is rising loan loss provisioning, which is expected to claim an increased proportion or gross earnings in 2014.

Fidelity Bank Plc saw a sharp fall in profit in 2013 but the 2014 financial year looks likely to be one of a high rise. A picture of volatile profit behaviour seems to mark the bank for high risk. A big fall in 2013 followed a big rise in 2011 and then another big rise is expected in 2014 – quite an uncomfortable pattern for anyone who wants stable earnings track.

It is in any event good news from the bank in 2014 as per the interim reports. As at the end of the third quarter, after tax profit was N11.25 billion, already far ahead of the N7.72 billion the bank posted in the 2013 full year. The full year expectation for 2014 is the doubling of profit, which remains a recovery after the bank fell from its profit peak of N18.20 billion achieved in 2012.

The strength to grow profit came from cost savings in the face of only moderate gains in revenue. Management prevented interest expenses from rising while it grew interest income. It also cut down on impairment charge for loan losses but could not prevent a 14% growth in operating cost. The new strength for Fidelity Bank in the 2014 operations is the ability to improve net profit margin from 6.1% at the end of 2013 to 11.7% at the end of the third quarter.