Sterling Bank: Weak Asset Growth, Liquidity Concern Worsen Earnings Outlook
Following a weak outing in the first quarter, Sterling Bank Plc revenue performance remained subdued in the first half of 2020 amidst weak assets growth.
Though, analysts explained that lender has strong headroom to improve its bottom line in the second half of the year but a key threat remains increased balance with the apex bank.
Sterling bank suffered increased cash reserve ratio debits for failing to meet the Central Bank of Nigeria’s loan to deposits ratio target.
Understandably, COVID-19 outbreak worsened economic and regulatory challenges that faced the lender in the period.
Gross earnings lifted marginally in the second quarter of the year, thus moderated the decline in topline to 2.85% in H1:2020, from 6.67% in Q1:2020.
The bank’s topline which amounted to NGN70.23 billion in H1:2020, was adversely impacted by depressed asset yields which fell to 13.20% from 14% in H1:2019, causing a 4.28% decline in interest income.
Also, Meristem explained that fee-based income sustained its descent, with a 29.70% year on year decline in H1:2020, due to the cut in electronic banking fees.
The bank’s trading income (+242.83% year on year growth to NGN3.95 billion) however, continues to benefit from relatively higher prices of bonds and treasury bills in the secondary market.
“We affirm our earlier position that the weak growth in its earning assets is a key risk factor to topline growth for the bank, considering that its interest-earning assets have only grown by 0.66% year to date”, Meristem stated.
Meanwhile, analyst said given the depressed yield environment, they reckon that a significant growth in earning assets is required to drive growth in topline.
Analysts however explained that it does not help the bank that 16.66% of its total assets as at H1:2020 is domiciled with the CBN and therefore yields no interest.
“Based on the identified risks and considering that we do not see significant headroom for more trading gains in H1:2020, we review 2020 gross earnings growth forecast”, Meristem noted.
For the financial year 2020, analysts forecasted that Sterling Bank gross earnings would drop by 4.84% year on year as against initial expetation of a 1.60% drop.
Yet, analysts said Sterling bank has more room to improve bottom line in the year.
Explaining this, Meristem stated that the lender has continued to drive down cost of funds (CoF) by leveraging the low interest rate environment and improving its current and savings accounts (CASA) mix.
Unlike in Q1:2020, the decline in CoF (to 5.00% from 6.50% in H1:2019) translated to an increase in net interest margin to 8.20% from 7.50% in H1:2019.
However, the gains in net interest income were quickly eroded by significantly higher loan provisioning in H1:2020, as its Cost of risk jumped to 2.10% from 0.70% in H1:2019.
The bank recorded 165.83% year on year increase in loan provision in the first half due to COVID-19 induced lockdown that stopped economic breathe.
So, analysts stated that high impairment charges are broadly in line with expectation so far, but Meristem expects some moderation in the rest of the year owing to a generally improving business landscape, stable crude oil price and slow growth in loan book.
Despite the higher provisions, the Sterling bank achieved a significant improvement in cost efficiency as cost-to-income ratio (CIR) fell to 72.60% from 80.30% in H1:2019.
The improvement in cost efficiency is however yet to significantly reflect on bottom line performance as both Profit Before Tax (PBT) and Profit after tax (PAT) fell by 5.38% and 4.38% year on year, to NGN5.68 billion and NGN5.41 billion respectively.
“We expect lower CoF and a further moderation in operating expenses growth to mitigate the impact of high credit loss charges, hence we maintain our projection of a relatively flat bottom line performance”, Meristem said.
Liquidity Position Still a Matter of Concern
Due to serial cash reserve ratio (CRR) debits for failure to meet CBN loan target, Sterling Bank’s balance with CBN has increased significantly.
Nothing the development, analysts expressed concern over liquidity position of the lender as the amount sterilise took away value in the period.
Meristem said net operating cash flows improved from negative position of NGN62.60 billion in Q1:2020 to deficit of NGN35.27 billion.
However, concerns arise from the observation that the largest portion of operating cash outflows were due to increased CRR debits (NGN93.45 billion) which analysts believe is not value accretive.
Meristem explained that the firm posits that this might be due to the fall in its loan to deposits ratio (LDR) to 64.30%, which is below the regulatory minimum.
However, the investment firm said it expects the bank to place a focus on keeping its LDR above the benchmark to avoid further pressure on liquidity.
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“We do not have any concerns over any other prudential metrics as they are within regulatory limits”, Meristem explained.
However, analyst said that expectations for full year performance remain largely unchanged, albeit significant growth in earning assets and transactions volumes are considered upside risks to its estimates.
“We maintain our expected earnings per share (EPS) at NGN0.36 while target price earnings is revised to 3.97x from 4.58x”, Meristem stated.
Sterling Bank: Weak Asset Growth, Liquidity Concern Worsen Earnings Outlook
