Skye Bank Plc released its 2012 Audited Accounts posting a Gross Earnings of N127.7billion up from the N102.3billion posted in 2011. Net operating profit at the end of the period was N15.6billion, a massive 480% improvement from N2.8billion posted in 2011. The bank will proceed to post a profit after tax of N12.6billion an over 870% rise from the N1.3billion posted a year earlier. Things couldn’t have been better or is it getting worse?
Result overview
When a bank increases earnings by more than 8x it is either the prior year result was a loss or a major plummeting of profits. It could off course also mean that the current result was due to some exceptional income or extra-ordinary income that are unlikely to occur again. So what was Skye Bank’s issue? Skye Bank suffered a tumultuous 2011 writing off about N26billion in loan losses. The bank just barely managed to post a profit of N1.3billion. In August 2012, the CBN put restriction on banks participating in foreign exchange auctions. Their share price took a beating on that announcement as investors expected the bank to incur huge cost in its inter-bank lending rate.
Skye Bank’s Net interest Income Margin for 2012 was 44% way lower than the industry average of 60%. The bank thus incurred N66 in interest expense for every N100 of interest income earned. As if that was not enough, the bank further wrote of another N13billion in loan losses during the year taking the total write offs for just two years to a whopping N40billion. Their 2012 write off is about 30% its Net Interest Income. Compare that the Diamond Bank at 19%, Zenith at 5.8% and GTB at 0.6% and you know how bad that is. Return on Equity at the end of the period will end up being 12.2% and Return on Assets just 1.6%. Financial Year 2012, despite being an improvement on 2011 results, provides a platform for erasing the errors of the past. The only problem is that for banks, the past is mostly always representatives of the future.
To buy or not?
Skye Bank announced a plan to raise 150m (N24billion) to shore up its value and furthermore the capital adequacy ratio. Its share price was N5.80 today shedding 3.3% on the day. The share price is currently 6x its current earnings per share of N0.95 (95 kobo) and 28% less than its net book value per share. So if you are asking if the share price is cheap on those basis then it surely is. But that would be a misleading pricing mechanism. The risk of further loan losses is still lurking and competition is rife in the industry, so putting an extra 17% discount on the current price will be a good start for the bargain hunter. Nevertheless, for those who have the risk appetite, it probably time to buy,
Skye Bank 2012 Audited Accounts is posted on the website of the NSE