Analysis: Sterling Bank, where are the returns? 

Age, like they say, is nothing but a number, but not when you were born in the same year Nigeria gained its independence. As a pioneer merchant bank, Sterling Bank, formerly NAL Bank, is time tested and has survived many battles. From restructuring to mergers, rights issues and private placement, it has seen it all. It’s, as we speak, in another corporate revival. With a new generation of younger “agile” workers, it has set quite a lofty standard for itself.

Bank’s Chief Executive Officer, CEO, Abubakar Suleiman, who resumed in April 2018 set out the bank’s mid-term objectives (2017-2021), which include to grow its market share, diversify funding base, reduce non-performing loans and increase return on average equity.

These objectives are hinged on Agility, Business Specialization and Digitization of its operational model. It also adopted the HEART initiative, an acronym for Health, Education, Agriculture, Renewable Energy and Transportation, which it will be supporting through partnerships, investments and loans. This is a huge departure from the days of its self-imposed “One customer bank” mantra.

As we revel in the second half of its medium-term strategy, we take a pause to assess how the bank has performed in what is probably its most critical objective, return on average equity.

In its 2019 FY interim result, the bank reported profits of N10.8 billion up from N9.2 billion a year earlier. Customer deposits also rose from N793 billion in 2018 to N892.6 billion in 2019. Modest improvements, considering a difficult operating environment for most banks in the tier 2 space. Returns on equity, where it matters the most, is where the bank continues to struggle.

In 2019, the bank posted a return on average equity of just 9.8% up from 9.2% a year earlier. Returns in 2017 was just 8.56%, highlighting just how onerous the task is for management. To be more specific, the task is figuring out how to bring down its ostensibly high cost to income ratios.

Sterling Bank reported a cost to income ratio of 80.5%, which means for every N100 of gross earnings, N80 goes to operating expenses. To put this into perspective, Sterling Bank’s operating expenses of N70.2 billion for 2019 is what GTB incurred in the first half of 2019 (N69.8 billion).

In the 6 months that GTB incurred this cost, it generated an operating income of N185.6 billion compared to N87.2 billion. So, it’s either a revenue issue or an operating expense issue. Half empty, half full.

If we assume that the bank is not at the same scale to generate the same revenue GTB or even Zenith Bank earns, then it must balance it by being aggressively cost-efficient. There are several leads it may have to focus on. Repairs and Maintenance, for example, cost the bank N7.3 billion in 2019, after spending another N7 billion in 2018. Admin and Office expenses incurred N5.4 billion and N4 billion respectively in one year.

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Perhaps some new blood recently injected into executive management could help turn things around, helping position the bank to achieve its goals. If it’s to stay competitive, profitable and agile, then it must be aggressive where it matters.  Social media is one of them, but not by throwing jibes. It needs to innovate faster and adopt newer and more impactful technology. It must do better and let us know what it stands for. Is it a bank for the future or bank for the present? Investors are keen to know.

Investors on the sidelines will remember the 75.9% YTD return in share price appreciation in 2018 and hope that 2020 ends like 2018 and not last year when its share price returned 4.7%.

Sterling last paid dividend in 2018, dishing out a paltry 2 kobo per share to its shareholders. With ROAE, share price appreciation and dividend yield all below par, pressure is on the bank to deliver on at least one. When it will deliver on any of the trio is anyone’s guess.