“Need a loan? Care to see if you qualify now”? ‘You want to own a Kia? Skoda? Pajero? with just 20% deposit your bound to get a finance to help you achieve your desired and you only have to pay in 36months’. These are some of the pronouncements your here from Sterling Bank as it aggressively increases it lending with the hope that bottom line will improve. Has this worked so far? Sterling Bank released its 2012 Audited Accounts with Gross Earnings rising 44% to N68.8billion. Net Interest Income also rose 32% to N23.89billion and other income from commissions and investments adding a nicely N15billion. The bank will go on to post a pre-tax profit of N7.5billion up 33% from N5.6billion posted last year.
Sterling Bank avoided making a loss last year despite having to write off over N6billion in loans impaired. This year they face no such threat, writing back about N243million in recovered loans. Net Interest Margin came out at 44% as the bank earned N44 for every N100 in interest income derived from its lending activities. It will be interesting to know what the break down of the banks interest income was during the period considering that most Nigerian Banks continued to see strong net interest margins on the back of risk free lending. For example, the likes of Zenith and GTB both posted margins in excess of 70%. At 44% the bank must be paying a higher amount on its deposits a factor that limits the spread they can get from their lending. At N23.8billion this year the bank can boast of a 43% rise over the prior year, expected of a bank that is hustling to catch up with the big five.
Operating Expenses for the bank also rose 31.9% at a period when banks have been aggressive at cutting down on expenses. Even though as a percentage of Operating Income expenses faired better than last year one would expect the bank to achieve a opex margin of at-least 20% if it is to stay relevant and competitive. Almost every cost centers increased this year with personnel expenses accounting for N9.3billion (23% of operating income). Depreciation cost rose to N2.5billion (2011: N1.5billion) and Other operating expenses N19.9billion (2011:N12.4billion). Had it posted an operating profit margin of 20%, its pre-tax profits may have been N13.7billion instead of the N7.5billion actually earned.
What should a shareholder be worried or excited about?
As per excitement, one would be happy that the bank is at least still able to post profits which is higher than last year’s. One particular aspect that should be looked at is the operating profit which as risen 100% to N7.5billion. It shows that the banks operation has at least improved over the last year despite rising operational cost. My worry however lies with its ability to compete in the coming months as banks consolidate on their improved balance sheets and begin risk lending. The FG is about to double down on borrowing which will surely see banks reallocate assets to lending to businesses. With the big five leveraging on their huge balance sheets to lend to better quality assets, the likes of Sterling may have to be exposed to riskier and rapidly growing retail businesses. For example, whilst the likes of Zenith, GTB and Access bank increased lending 10.4, 10.8 & 4% respectively, Sterling increased theirs by 41%. Thus their loans is about 5x its Net Assets.
A share worth buying?
Sterling Bank share price has risen 197% over the last year and currently trades (April 7,2013) at about N3.05 per share. It also proposed a dividend of 20kobo per share resulting in a yield of about 6.5% based on current share price. Based on this result its share price is about 6.93X its earnings per share and just 1.02x its book value. The share price on the back of its fundamentals is about where it should be even if I wouldn’t consider it cheap. Those who rely on its growth potentials may consider buying at this price as a mere 50% rise of its P.E ratio will immediately put the price at N4.55. I won’t be surprised if this happens in the next two months going by recent trends in the market and its impressive dividend yield. However, its ability to grow revenues and profit without taking in poor risk assets may determine its trajectory in the coming years.
The Bank MD, Mr Yemi Adeola has been at the helm since 2005 and has guided the bank past the very turbulent years of 2008-2009. However, the remaining 2 years of his reign may well shape the way he is perceived long after he is gone.