Sterling Bank Extends 58% of Its Loan Portfolio to 20 Customers
Sterling Bank Plc faces heavy loan concentration risks as the 20 largest obligors account for more than 58% of the lender’s loan portfolio as of the year-end 2020, according to a rating report from GRC. Abubakar Suleiman, Sterling Bank Chief Executive Officer will be four years leading the Tier-2 lender in March 2022.
While there are much more to do, so much has happened in between, from a serial devaluation of the local currency that gives big banks unfair advantage record a massive gain on their positive net dollar positions – which appears unlikely for small banks.
In the banking space, heavyweight lenders account for about 80% of the market share, from loans, deposits and profitability measures except for the stock market performance. But they are however liquid and exhibit steep volatility too.
The pandemic breaks, the moment that tested the Nigerian banking sector resilient since the 2008 financial crisis, raised pressure in the economy and lenders had their share of high default rate worries.
Deposit money banks balance sheets shifted, though remain stronger when compared with the 2008 bubble on account of expected credit losses from the implementation of financial reporting standards (IFRS).
Speaking on the pandemic impact on Sub-Saharan Africa and where the pains have been felt move, Moody’s confirmed in a podcast on emerging market decoded that Nigerian banks assets quality did not depreciate significantly compare to peers in the region.
To keep the industry numbers intact, the Central Bank granted local bank forbearance to allow some amount of loan restructuring and then, the real situation was just shadowed by the CBN allowance. In all these, Sterling Bank keeps it focus on creative side lending and deposit takings – but all has not been really.
More than 63% of the bank’s 28.79 billion outstanding shares are controlled by less than 30 individuals and entities, though the mid-lender still maintain the requirement for a free float on the Nigerian Exchange. According to the bank’s financial statement, the lender maintained 36.07% free float as of June 2021.
Sterling is a mid-sized bank and categorised as a tier-2 bank in the Nigerian banking industry, with a modest market share of 3.4% and 2.6% measured by customer deposits and total assets respectively as of 2020.
GCR Ratings in a recent report said the 20 largest obligors accounted for 58.3% of loans in Sterling Bank.
The mid-tier lenders raised loan books from N596.827 billion at the yearend 2020 to N646.883 billion at the end of the first half of 2021 amidst a 65% loan to deposit ratio target set by the apex bank.
However, the key shareholdings structure in Sterling bank Plc did not change from 44.51% since a year ago with Silverlake Investment Limited accounting for 25%, State Bank of India -8.86%, Mike Adenuga -5.63% and Ess-ay Investment -5.02%.
Other influential shareholders in the bank include Hak Air Limited -3.36% and unnamed company 2..66%, Rankinton investment Limited own 2.40% and Pacifica Credit Ltd 1.93%.
Apart from some individual that wields shareholding influence in the bank, companies like Skyview capital also has a higher equity interest of 1.49%, Glomobile Ltd -12.3%, Kogi United Company Nig. Ltd – 1.22% and AX SCML Nominees -1.19%.
In the first of half 2021, the bank reported a 2.62% increase in net interest income that printed at N30.986 billion from N30.915 billion a year ago. This happened as the company’s interest income slowdown amid a low-interest-rate environment while payments to providers of funds also drop.
Sterling bank earning per share however came at 20 kobo on each share outstanding from 19 kobo in the comparable period in 2020 following a moderate growth in profitability. Lender’s profit after tax settled at N5.691 billion in the first half of 2021, a 5% increase when compared with N5.415 billion reported in the equivalent season in 2020.
Higher tax provision against the bank’s pretax profit of N6.061 billion, a 6.73% rise from N5.679 billion reported last year slowed down the net growth on the bottom line.
The bank’s financials show that operating expenses which printed at N35.514 billion after a 10.5% jump put much pressure on lender’s gross earnings in the period while credit losses provision witnessed yet another jump.
In its latest assessment of the bank’s performance, GCR affirmed Sterling Bank Plc.’s national scale long-term and short-term issuer ratings of BBB (NG) and A3 (NG) respectively; with the outlook revised to stable from negative.
GCR said in the report that ratings assigned to Sterling Bank Plc reflect its good business profile, sound risk position, stable funding and liquidity, albeit counterbalanced by the relatively moderate capitalisation and high loan book concentrations.
It noted that Sterling’s competitive position is supported by its strong track record, having maintained a positive earnings trajectory in the last five years, from 2016 to 2020.
According to the rating document obtained by MarketForces Africa, GCR said although the bank has a capital adequacy ratio above the 10% regulatory threshold, growing to 18% in 2020 from 14.7% a year earlier, the ratings computed capital ratio registered within the low band at 14.9% from 13.9%.
GCR analysts forecasted this to remain within the 13%-14% range over the rating horizon, barring any injection of additional tier 1 capital or significant improvement in an internal capital generation.
The bank is noted to have a low non-performing loan which printed at 1.9% at the end of the financial year 2020, from 2.2% in 20219, significantly below the regulatory tolerable limit of 5%, and broadly compares favourably with the industry average of about 6%.
The rating agency also spotted that the bank’s credit losses registered at 1.3% in 2020 from 0.9%, relative to the industry average of about 3% in 2020. “Over the next 12-18 months, GCR expects the bank’s NPL ratio and credit losses to remain within a similar range”.
Though on the increase, lender’s foreign currency loans printed at 23.7% of the total loan portfolio from 22.9% in 2019, also ranks favourably to the industry average of 35%.
Conversely, GCR said in the report that Sterling bank Plc evidenced loan book concentration, with the twenty largest obligors accounting for 58.3% of the loan portfolio as of 2020.
It said the single largest obligor constituted 24% of shareholders’ funds as of the financial year 2020, breaching the regulatory threshold of 20%, but balanced against management’s assurance of ongoing efforts at normalising the ratio.
“We would expect an improvement in loan book concentration, as well as regularisation of the largest exposure to comply with the regulatory single obligor limit of 20%. A downward review of the ratings could be made following a deterioration in the Bank’s capitalisation and risk position”.
Positively, market-sensitive income (trading gains) constituted a relatively moderate 13.4% of total operating revenues as at 2020 from 6.0% in 2019, underscoring the bank’s minimal exposure to market risk.
In the first half of 2021, the bank’s trading income printed at N2.572 billion, tumbled by about 35% from N3.946 billion in the comparable period in 2020.
GCR Ratings assessed the bank’s funding and liquidity at the intermediate level, reflecting satisfactory liquid asset coverage of the funding base. It said the funding structure is broadly comparable with peers, as customer deposits comprised 84.4% of the funding base as of 2020, from 87.7%.
The deposit book is relatively diversified, with the single and top twenty largest depositors contributing 5.1% and 19.3% to total deposits respectively as of the financial year 2020.
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As of 31 December 2020, the GCR liquid asset coverage of total wholesale funding and customer deposits stood at 2.8x and 35% respectively, reflecting the bank’s moderately positive liquidity level.
Sterling Bank Extends 58% of Its Loan Portfolio to 20 Customers
