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Sterling Bank’s Sustained Growth Promise Higher Returns

Sterling Bank office

Sterling Bank Plc’s sustained focus on quality growth and gains from successful merger and divestments means better return to shareholders, writes Eromosele Abiodun
Four years after the 2008 banking crisis, the Nigerian banking sector has continued to reap the benefits of the reforms that followed, with rapid growth in profitability and significant decline in bad debt.

Also, asset quality has improved, while capital and liquidity positions remained solid, despite heightened uncertainties in the external environment.

The five biggest banks in the country saw their growth double in the first half of this year. Their combined profits soared to $1.6 billion, four times the $400 million they achieved in 2005.

Experts believe that given the high margins recorded across their bottom-line, other banks will end the year with astonishing returns and among the banks that benefited from the banking sector reforms is Sterling Bank Plc.

The bank has since the banking sector reforms achieved a generally positive performance outlook. The bank’s sustained focus on quality growth and gains from successful merger and divestments impacted positively on profit and loss accounts as well as balance sheet positions. Audited report and accounts of Sterling Bank for the year ended December 31, 2011 showed a larger, nimbler, and healthier and more efficient bank. With almost a double in total size and 61 per cent increase in loans and advances, the bank more than halved the proportion of non-performing loans to surpass the 5.0 per cent industry target.

Sterling Bank witnessed appreciable growths across income lines with 110 per cent increase in non-interest incomes and 23 per cent increase in the larger interest income resulting in 49 per cent growth in gross earnings. Significant increase in net earnings enabled the board to declare cash dividend per share of 10 kobo, which translated into double digit yields at current market consideration. Besides, stronger earnings reassure on the sustainability of the bank’s upwardly dividend payout.

However, notwithstanding 56 per cent increase in 2011, shareholders’ funds lagged behind the rapid expansion witnessed in 2011. Lower margin occasioned by industry-wide tight liquidity also impinged on underlying profitability of the core banking business and overall average profit.

Capital Adequacy Ratio
Sterling Bank’s paid up share capital increased by 25 per cent from N6.28 billion in 2010 to N7.85 billion in 2011. The increase was due entirely to the shares exchange that resulted from the merger with Equatorial Trust Bank (ETB) Limited during the year. Shareholders’ funds grew by 56 per cent to N40.95 billion as against N26.32 billion. Total balance sheet size nearly doubled at N504.43 billion compared with N259.58 billion. Total deposits doubled by 104 per cent from N199.27 billion in 2010 to N406.52 billion in 2011. Consequently, total liabilities also doubled from N233.26 billion to N463.5 billion.

Shareholders’ funds amounted to 8.1 per cent of total assets in 2011 as against 10.1 per cent in 2010. The proportion of equity funds to loans and advances stood at 25.6 per cent in 2011 compared with 26.5 per cent in 2010. Permanent assets/equity funds ratio stood at 22 per cent as against 16 per cent in previous year.

Asset Quality
The Bank improved further on its assets quality in 2011 sustaining an effective credit risks assessment framework that ensured that the bank surpassed assets quality target while achieving a robust loan growth. While gross loans and advances grew by 53 per cent in 2011, non-performing loans dropped by 29 per cent indicating a bad loans/gross loans ratio of 4.9 per cent in 2011 as against 10.7 per cent in 2010. With the ratio of 4.9 per cent in 2011, Sterling Bank has surpassed Central Bank of Nigeria (CBN)’s industry target of 5.0 per cent. Probable threat from non-performing loans to equity funds halved from 44 per cent in 2010 to 20 per cent in 2011.

The Bank witnessed appreciable growths in the top-line and bottom-line, with a 60 per cent increase in net earnings. Gross earnings grew by 49 per cent from N30.39 billion to N45.17 billion. Interest incomes had grown by 23 per cent from N24.47 billion to N30.17 billion while non-interest income doubled by 110 per cent to N12.41 billion compared with N5.92 billion in 2010. However, with interest expenses rising by 56 per cent from N10 billion to N15.6 billion, net interest rose marginally from N14.47 billion to N14.56 billion. Operating expenses stood at N20.44 billion in 2011 as against N15.16 billion in 2010.

With exceptional income of N554 million and tax write-back of N1.18 billion, profit after tax and exceptional item rose from N4.18 billion in 2010 to N4.64 billion in 2011. The bank also realised N2.04 billion from the sale of some subsidiaries as it started the divestment from non-core banking businesses to focus on core banking operations. Key underlying profitability ratios showed mixed performance. The proportion of operating expenses to total revenue reduced from about 50 per cent to 45 per cent, showing a better cost efficiency and productivity. Non-interest income improved to 27.5 per cent of total earnings in 2011 compared with 19.5 per cent in 2010.

However with lower lending rate, net interest margin dropped from 59 per cent to 48 per cent. This also reflected on average pre-tax profit margin, which slipped from 12 per cent in 2010 to 7.7 per cent in 2011. Earnings per share stood at 51 kobo in 2011 as against 33 kobo in 2010. Return on equity improved from 15.9 per cent in 2010 to 16.3 per cent in 2011. Return on total assets however slipped marginally from 1.4 per cent to 0.7 per cent.

The liquidity position of the bank improved in the immediate past year with more cash back-up against liabilities. The proportion of cash and bank balances to total liabilities improved from 12 per cent coverage in 2010 to about 20 per cent in 2011. Loans and advances/total assets ratio stood at 32 per cent in 2011 as against more than 38 per cent in 2010 while loans and advances/ total deposits ratio closed 2011 at 39.3 per cent compared with 49.8 per cent in 2010.

Analyst’s View
Meanwhile, analysts believe the performance of Sterling Bank underscores the feasibility of its organic and inorganic growth strategies and reaffirms the steady growth outlook of the bank. “With the ongoing streamlining of its operations into core-banking operations and sustained drive to achieve working balance between assets growth and quality, Sterling Bank’s 2011 performance signposted a commendable growth trajectory that holds out significant promises in terms of returns and steadiness.

“With the gains from the merger with ETB becoming more evident in the current business year and a stronger and healthier balance sheet, Sterling Bank appears to be in good stead to significantly improve performance in the years ahead. Overall, there is a reasonable basis to assume that the bank would further consolidate its upwardly performance in the period ahead, “said experts at Emerging Capital Limited.