Sterling Bank: Disappointing income, rising credit losses hit profit

Sterling Bank managed to escape the huge profit drops that a number of banks experienced in 2015 but has joined the sustaining development in the first quarter of the current year. The bank suffered a drop of 35% in profit in the first quarter, reflecting disappointments from all its fee income lines and a big rise in provision for credit losses. 

The full year profit outlook remains promising if loan loss expenses can be kept from accelerating. Should the bank prevent profit from coming below the first quarter mark for each of the remaining quarters, it could escape profit drop again in the current year and show a marginal growth as happened last year.

Gross earnings declined by 6.4% year-on-year to N25.50 billion in the first quarter, which was exclusively accounted for by major drops in fee incomes. Fee and commission income dropped by 26.6%, net trading income fell by 30.5% and other income also slumped by 69% at the end of the first quarter. A moderate improvement of 4% in interest income could not remedy the weakness from non-interest income.

Based on the first quarter growth rate, gross earnings are projected at N105.2 billion for Sterling Bank at the end of 2016. That will be a decline of 4.3% from the gross income of N110.19 billion the bank posted in 2015.

After tax profit dropped by 35% to N2.54 billion year-on-year at the end of the first quarter, reflecting the decline in gross earnings and a strong growth in impairment charge for credit losses. Based on the first quarter performance, net profit is projected at N10.5 billion – about the same figure it posted at the end of 2015.

A favourable development for the bank during the first quarter is a drop of 14.4% in interest expenses against the moderate increase in interest income. That raised net interest income by 24.7% to N11.41 billion at the end of the first quarter. This is a reversal of the development last year when interest expenses grew ahead of interest income, which depressed net interest margin in the year.

The drop in fee-based income however caused a slight decline in operating income while a major growth of 54.2% in impairment charge for loan losses to N1.44 billion is another key factor that undermined profit performance of the bank at the end of the review period. The bank recorded a moderate increase of 3.6% in net loans and advances to N350.9 billion in the first three months of the year over the last December closing position.

Loan loss expense is the item to watch in the course of the year, as a sustained year-on-year growth will hurt profit performance further. The bank is rebuilding the portfolio after dropping by close to 9% to N238.73 billion in 2015. It had lost about 10% of customer deposits last year and a further decline of 4.3% had been recorded in the first quarter.

There is a firm hold on operating cost, which has helped to moderate the impacts of revenue weakness and rising impairment charges on the bottom line. However a moderate increase of 3.7% in operating cost to N12.62 billion at the end of the first quarter claimed an increased share of gross earnings from 44.7% in the same period last year to 49.5% at the end of the first quarter – one of the highest cost margins in the banking sector.

The bank lost net profit margin in the first quarter due to falling revenue and rising cost. Net profit margin declined from 14.4% in the first quarter of last year to 10% at the end of the first quarter. The bank earned 9 kobo per share at the end of the first quarter, down from 14 kobo in the same period last year. The full year outlook indicates earnings per share in the region of 36 kobo for Sterling Bank at the end of 2016.