Sterling Bank Plc: Interest expenses slide leads to significant rise in net interest income

ALSO THE STRONG LIQUIDITY POSITION OF THE BANK AND POTENTIAL PROFITABILITY FROM INCREASED FOCUS ON LENDING WOULD CUSHION THE EFFECT OF THE LIQUIDITY WITHDRAWALS ON THE PERFORMANCE OF STERLING BANK

Sterling Bank Plc (Sterling Bank) is a full service national commercial bank in Nigeria with focus on consumer banking, trade finance, investment banking and capital market activities. It also provides wholesale banking services and offers banking products through its over 160 branches nationwide, 5,000 POS and 3,800 alternative delivery channels, 300 automated teller machines, telephone banking and other e-banking offerings. In over 50 years of operations, Sterling Bank (formerly NAL Bank) has evolved from the nation’s pre-eminent investment banking institution to a fully-fledged commercial bank; and completed a merger with 4 other banks – Indo-Nigeria Merchant Bank, Magnum Trust Bank, NBM Bank and Trust Bank of Africa – as part of the 2006 consolidation of the Nigerian banking industry. Popularly known for its “One Customer Bank” slogan, it evolved to a bigger bank upon its merger with the defunct Equitorial Trust Bank (ETB). Sterling Bank Plc’s (Sterling) released their results for the Period ended September 30th, 2016 showing a modest decline of 2.64% in gross earnings to N79.65 billion from N81.81 billion in the corresponding period. Consequently, the Bank has kept up with its regular dividend payment, and has recommended a total dividend payment of N2.59 billion (on the basis of N0.09 per share) for every 50 kobo share. Gross Earnings was driven by Interest income which grew by only 12.40% to N68.89 billion in September 2016 from N61.29 billion in September 2015, due to increase in the Bank’s loans and advances to customers. Conversely, interest expense decreased by 12.05% to N27.37 billion in September 2016 from N31.12 billion in the corresponding period of 2015. Expectedly, net interest income for the period rose considerably by 37.62% to N41.52 billion from N30.17 billion in the prior year of 2015, due to the earlier mentioned significant decrease in interest expenses and an increase of 12.4% in interest income. Furthermore, non-interest income reduced by 47.6% to N10.8 billion in September 2016 from N20.5 billion in September 2015 largely due to a 34.2% decline in fees and commission income. Increased operating expenses greatly impacts net income Total expenses during the financial period of 2015 increased by a modest 5.01% to N39.01 billion compared to N37.15 billion in the corresponding period of 2015. The main reason for the modest increase in total expenses was due to inflationary pressures but moderated by the bank’s strategic cost control measures during the financial year. Further breakdown of the total operating expenses showed that operating expenses increased by 16.81% to N10.44 billion from N8.94 billion which was largely driven by inflationary pressures during the period, Personal expenses for the period declined by 0.33% to N8.69 billion from N8.72 billion which was due to the deployment of outsourced services while depreciation and amortization increased by 8.21% to N3.10 billion from N2.86 billion due to the on-going investments in a number of technology-led services improvement initiatives across core and subsidiary systems and channels optimization. The aforementioned rise in total expenses greatly affected the company’s profitability, as profit before tax dropped massively by 26.89% to N6.07 billion in September 2016 from N8.30 billion in the corresponding period of 2015. Net income also followed suit with a massive decline of 26.64% to N5.54 billion in September 2016, from N7.55 billion recorded in September 2015.

GOOD ASSET QUALITY

Sterling Bank’s total assets rose by 11.36% to N890.30 billion in September 2016 compared to N799.45 billion achieved in December 2015. The significant increase was caused by a massive rise in Pledged financial assets to N125.77 billion in September 2016 from N69.34 billion in December 2015; reflecting a change of 81.39% and rise in intangible assets to N1.88 billion from N1.00 billion, reflecting a 88.14% change. On the other hand, total liabilities increased by 14.80% to N808.04 billion from N703.89 billion in 2014. This was caused by a massive increment of 103.94% in debt securities issue to N9.31 billion in September 2016 from N4.56 billion in December 2015 and a rise of 20.28% in other borrowed funds to N72.51 billion from N60.29 billion in December 2015. Furthermore, the banks total equity (shareholders fund) decreased by 13.93% to N82.25 billion in September 2016 from N95.57 billion in December 2015.

MODEST DECLINE IN PERFORMANCE RATIOS

The Bank’s Return on Equity (ROE) decreased slightly to 6.73% in September 2016 from 7.90% in the corresponding period of 2015. Conversely, Return on Assets (ROA) decreased slightly to 0.62% in September 2016 from 0.94% in the corresponding period of 2015. Furthermore, at a capital adequacy ratio of 10.7%, the bank’s CAR remains above the minimum regulatory requirements of 10%.

HOLD RECOMMENDATION MAINTAINED

Despite the regulatory policies in the banking sector which threaten the Bank’s income generating capacity, we believe the management of the Bank will continue to focus its efforts towards strengthening income generation from financial intermediation. Also the strong liquidity position of the Bank and potential profitability from increased focus on lending would cushion the effect of the liquidity withdrawals on the performance of Sterling Bank. The Banks top and bottom line performance narrowly missed our projection for the year modestly in FY 2015. Considering the above, we revise our revenue and net income projection to N107.73 billion and N8.28 billion respectively the full year 2016, leading to an EPS of N0.30 for the year. Therefore, using the price to earnings multiples valuation method with industry PE of 0.59 consisting of peers companies in the same Tier II category (Fidelity Bank, FCMB, Diamond Bank and Skye Bank) in comparison to Sterling Bank’s PE ratio, we arrived at a 6-month average target price of N0.92 per share, which translate to a 31.43% upside potential on the current stock price of Sterling Bank Plc shares. We therefore maintain our BUY recommendation on Sterling Bank Plc shares.