Sterling Bank: Profit slows down as credit losses rise

Sterling Bank recorded a slowdown on profit growth at the end of the third quarter and that has undermined the strong full year growth projection for 2018. A sharp increase in credit loss expenses in the third quarter weakened the bank’s ability to convert its earnings into profit. The weakness was reinforced by a slowdown in revenue from 36% growth at half year to 21% at the end of the third quarter.

Rising interest expenses remains a big challenge for the bank, which consumed over 57% of interest income at the end of September 2018. The bank’s management is nevertheless maintaining the course of rebuilding profit for the second year though the full year profit expectation is significantly down from earlier projection.

The bank’s group operations at the end of September resulted in an after tax profit of N8.20 billion, representing a year-on-year increase of 39%. This is a slowdown from an outstanding growth of 63.4% at the end of the second quarter.

The full year profit is estimated to be in the region of N10 billion for Sterling Bank, a downward revision from the N12 billion earlier projected. That will be an increase of about 17%, good enough to sustain the bank’s recovery force for the second year, after it lost one-half of its preceding year’s profit in 2016.

Underlying the profit slowdown in the third quarter are a slowdown in revenue growth and a sharp increase in loan impairment expenses during the period. The bank closed the third quarter operations in September with gross earnings of N114.6 billion, an increase of 21% year-on-year. This is a slowdown from the 36% growth momentum the bank recorded at the end of half year operations.

The bank closed last year’s trading with gross earnings of over N133 billion. With the slowdown at the end of the third quarter, revenue growth projection is revised slightly down from N156 billion to N154 billion for Sterling Bank for 2018.

Non-interest income, accounted largely for the slacken revenue performance with a sharp drop of 85% in net trading income in the third quarter. At N5.7 billion at the end of the third quarter, the bank was therefore unable to improve net trading income reasonably from the half year position. At N93.6 billion, interest income equally slowed down from over 25% growth at half year to 19%.

Despite the sharp increase in loan loss expenses in the third quarter, the year-on-year position represents a drop of 53%. It is however a sharp increase from N1.84 billion at the end of June to N3.6 billion at the end of September. Loan loss expenses still present a cost saving centre for the bank so far in the year with reduced claims on interest income and gross earnings compared to the same period last year.

Rising interest cost remains a problem for the bank, though it moderated from 61% at half year to 29% at the end of the third quarter – well ahead of the 19% increase in interest income. That still permitted an increase of 20% in net interest income, against a decline of 5.4% at the end of the second quarter.

The slowdown in non-interest income also caused a slowdown in operating profit from 19% at half year to 14% at the end of September. Operating income stood at N60.85 billion at the end of the third quarter.

Unlike last year, the bank is unable to save cost from operating expenses due to rising administrative cost. Total operating cost grew by close to 26% to N48.73 billion at the end of September –one of the highest expense growth records since 2013.

Net operating income after credit loss expenses rose by 26% to N57 billion, reflecting the positive impact of the drop in loan loss expenses on the bank’s income statement on year-on-year basis. It accounted for the retained strength to grow profit and sustain the path of recovery.

Net profit margin has declined from 8.3% at the end of the second quarter to 7.1% at the end of the third quarter. It remains better than the closing net profit margin of 6.4% for the bank in 2017.

Earnings per share amounted to 28 kobo at the end of the third quarter operations for Sterling Bank, up from 21 kobo per share in the same period last year. The full year earnings per share expectation for the bank is 35 kobo. The bank earned 30 kobo per share at the end of 2017 and paid a cash dividend of 2 kobo per share.