Sterling Bank: The question mark on earnings

Sterling Bank has maintained earnings stability for the past five years running but whether it will be able to sustain the slow and stable growth pattern is the question mark on the bank in 2016. The bank has grown revenue and profit every year over the past five years in a slow and stable pattern that even some leading banks have not been able to attain. It is facing the challenges of falling revenue and rising cost this year that have weakened profit capacity, indicating that the bank may see the first profit drop in many years at the end of the current year.

The bank faced two major challenges it could not overcome in the first quarter and these are a drop in non-interest income and a rise in loan loss expenses, which eroded profit margin and led to a profit drop. At N25.50 billion at the end of the first quarter, gross earnings went down by 6.4% year-on-year, which was exclusively accounted for by sharp drops in all the fee income lines.

Revenue growth is expected to pick up in the course of the year, as economic activity improves from the first quarter lull. Gross income is projected at N104 billion for Sterling Bank at the end of 2016. That would be a decline of 5.5% from the revenue figure of about N110 billion the bank posted at the end of 2015. It had raised gross earnings by 5.5% in 2015, the lowest growth rate in many years.

Net profit amounted to N2.54 billion at the end of the first quarter, a fall of 35% year-on-year. Full year projection indicates net profit in the region of N9.2 billion for Sterling Bank in 2016. That will be a drop of over 10% from the profit figure of N10.29 billion the bank reported at the end of 2015. That will be the first profit drop the bank will see in five to six years, having improved profit every year for the past several years. A further rise in credit losses could raise the margin of profit drop.

Apart from the decline in revenue, there was a high rise of over 54% in loan loss expense in the first quarter, leading to a decline in net operating income. Loan impairment charges may keep rising, as the corresponding figure last year was just a small fraction of the full year figure. The bank’s net credit volume is moderately up by 5.1% to about N351 billion from the closing figure last year.

Operating cost is only marginally higher than the corresponding figure in the first quarter of last year but its share of gross earnings has increased. With the decline in revenue during the review period, operating cost margin has increased from 44.7% in the same period last year to 49.5% at the end of the first quarter.

The only favourable cost behaviour so far came from interest expenses, which declined by over 14% year-on-year. That was however the result of loss of customer deposits during the first quarter. At N565.33 billion at the end of the first quarter, customer deposits went down by 4.3% from December 2015 closing figure.

Sterling Bank lost profit margin in the first quarter, as revenue went down and costs grew generally. Net profit margin went down from 14.4% in the same period last year to under 10% at the end of the first quarter.

The bank earned 9 kobo at the end of the first quarter, declining from 14 kobo in the first quarter of last year. The full year expectation is 32 kobo per share against 36 kobo recorded in 2015. The bank paid a dividend of 9 kobo per share for its 2015 operations on 19^th April 2016.