Sterling Bank Q1 Earnings draw analysts’ Buy rating despite CRR pressure
Sterling Bank Plc reported gross earnings fell considerably by 6.67% to ₦32.92 billion in the first quarter (Q1) of financial year 2020.
Trades at ₦1.25, Sterling bank market capitalisation settled at ₦35.988 billion on Wednesday on 28,790,418,126 shares outstanding.
However, analysts at Meristem Securities Limited maintained muted outlook for the bank in 2020 in view of the anticipated consequences of COVID-19 on the general economy.
The firm explained that Sterling Bank lower earning asset base, tight liquidity position and high operating cost profile do not offer any competitive advantages.
The bank’s interest income which constitutes a major part of gross income (as it accounts for about 87%) declined by 7.77% to ₦28.40 billion.
Meristem Securities Limited acknowledged the impact of regulatory headwinds on the bank’s core business earnings.
However, the firm remarked that the decline in interest earning assets by 13.86% year to date to ₦1.21 trillion was also a significant downside factor.
Analysts at Meristem believe that much of the growth in the bank’s balance sheet was sterilized in additional cash reserves with CBN totaling ₦71.50 billion.
This is as result of the hike in cash reserve ratio (CRR), leaving little room for expansion of interest-earning assets.
On the flip side, non-interest income inched upwards +0.89% year on year to ₦4.52 billion.
This was supported by trading gains which surged +126.21%, primarily due to the higher prices of its debt securities in the secondary market.
Albeit, the downward revision of bank charges led to a 19.24% decline in gross fees and commission income to ₦3.95 billion.
Bearing in mind the significant impediments to topline growth – regulatory risks, weak asset growth, and COVID-19-induced recessionary pressures, analysts at Meristem project a modest contraction of 1.6% in gross earnings for 2020.
Income Losses Overshadow Cost Gains
Sterling bank cost of funds declined to 5.10% in the Q1 2020 compare to 6.60% in the comparable period in 2019.
The decline was attributed to the bank’s growing preference for cheaper funding.
The financial statement shows that current and savings accounts (CASA) mix improved to 64% as against 60% in Q1:2019.
Analysts at Meristem explained that lower funding costs did not translate to an expansion in net interest margin as the fall in asset yield from 14.40% in Q1:2019 to 12.90% eroded all gains.
Hence, net interest margin contracted to 7.70% as against 7.80% in the comparable period in 2019.
Analysts stated that the 41.04% year on year spike in impairment charges to ₦1.19 billion increased pressure on bottom line performance.
“It should however be noted that higher impairment charges have been observed across the industry in Q1:2020, due to a worsening in the country’s macroeconomic conditions”, Meristem explained.
The firm however stated specifically that operating cost inefficiency remains a major drag on the bank’s performance.
The bank’s unaudited financials show that operating expenses jerked up by 8.29%, while cost-to-income ratio also ticked up to 82.90%, from 78.80% in Q1:2019.
At the bottom line, Profit Before Tax and Profit after tax sloped downward by 32.20% and 36.27% to ₦2.22 billion and ₦2.07 billion, respectively.
Going forward, the firm expects reduced funding cost and a slightly lower operating expenses growth due to the impact of depressed earnings and higher impairment charges, which should keep bottom line afloat.
CRR Debits Threaten Liquidity Position
Analysts explained that as indicated earlier, the higher CRR debits of ₦71.50 billion incurred during the period significantly raised its effective CRR to 21.55% from 13.68% in 2019.
This drove net operating cash flows for the period deep into negative territory (-₦62.88 billion).
Consequently, analysts stated that Sterling bank liquidity ratio fell to 32.10% from 39.50% in financial year 2019.
This position is close to the edge as it was marginally above the regulatory benchmark 30%.
Analysts estimated further decline in the bank’s non-performing loan ratio to 2.00% from 2.20% in financial year 2019 as a welcome development given the weak economic backdrop.
Meanwhile, Meristem’s analysts stated that all other prudential ratios stayed above regulatory benchmarks.
Then, analysts revised the bank’s target price earnings ratio to 4.58 times as against 4.71 times previously estimated.
The firm stated that it expects earnings per share (EPS) to close at ₦0.36 compare to ₦0.39 that it has previously estimated.
“This yields a target price of ₦1.65, indicating an upside potential of 28.81%. Thus, we rate the ticker a BUY”, Meristem stated.
Sterling Bank Q1 Earnings draw analysts’ Buy rating despite CRR pressure
