Sterling Bank Plc expanded the balance sheet by 10 percent to N1.3 trillion as at the end of third quarter operations in September 2020. That was a stronger growth rate than recorded in three years. Asset expansion was led by cash and bank balances that rose by 90 percent to over N297 billion from the closing figure in 2019.
The key earning assets of the bank declined during the period. Customer loans and advances were slightly down at N610 billion at the end of September and the investment portfolio also dropped by 8.5 percent to N256 billion at the end of the third quarter.
The decline in loans and advances is further to a marginal decline the bank recorded in 2019. There has been no reasonable improvement on the bank’s credit portfolio since 2017. Even lending to other banks dropped by 59 percent to the lowest figure in several years at the end of the third quarter.
Rising loan impairment expenses appears to have warranted the lending caution on the part of the bank’s management in 2020. The expenses were already standing at 150 percent of the full year figure in 2019 at the end of the third quarter.
Management’s caution on new lending plus the decline in investment assets weakened interest earning capacity of the bank in 2020. Increased credit losses in the year added further strain on earnings for the bank.
Interest earnings dropped for the first time in a decade by 6.7 percent to N88.7 billion year-on-year at the end of the third quarter. The margin of decline had widened from 4 percent at half year, suggesting a likely further decline in the final quarter.
A quickening force on revenue performance however came from non-interest revenue, which grew by 19 percent year-on-year to N17.4 at the end of the third quarter. Net trading income provided the spur for non-interest income, which multiplied more than three and half times to N7 billion over the review period.
The increased margin of decline in interest income hindered the bank from growing revenue at the end of the third quarter. Gross earnings closed at N106 billion at the end of September 2020, which is a year-on-year decline of 3 percent.
The decline of 3 percent in gross earnings against an increase of 10 percent in total assets resulted in a decline in asset turnover from 0.13 at the end of 2019 to 0.11 at the end of the third quarter. The slight decline reflects a comparatively slower increase in assets than other banks over the period.
Cost saving from a decline in interest expenses presented a major operating strength for the bank for the second year in 2020. Interest expenses went down by 17 percent year-on-year to N39 billion at the end of September 2020. This represents a reduction of N8 billion over the period.
Interest expenses therefore provided a major cost saving centre for the bank in the year, dropping two and half times as fast as interest income during the period. The drop in interest expenses and the strong growth in non-interest income are the key favourable developments on the earnings story of Sterling Bank in 2020.
With the cost saving, net interest income improved against the drop in interest earnings. Net interest income went up by 3.5 percent to N49 billion out of the 6.7 percent drop in interest earnings.
The bank’s management also kept operating cost in check in the third quarter and closed the period with a slight reduction in total operating expenses at less than N49 billion. However the slacken performance in revenue raised the cost margin in the third quarter to 46 percent.
With the strong growth in non-interest earnings, the bank pushed up operating income by 7 percent to N66.6 billion at the end of the third quarter. The increase however failed to reach the bottom line.
Credit loss expenses consumed more than all the increase in operating income, leading to a marginal decline in net operating income after impairment charges at about N57 billion. Loan impairment charges rose by 148 percent to over N9 billion at the end of the third quarter – already 150 percent of the full year figure of N6 billion in 2019. It is the strongest growth in loan losses the bank has seen since 2014, which happened to the detriment of profit improvement.
Sterling Bank closed the third quarter operations with an after tax profit of N7.4 billion, a decline of under 3 percent year-on-year. A high rise in tax expenses accounted exclusively for the drop in after tax profit against a 5 percent improvement in pre-tax profit to N8 billion over the review period.
The bank’s management was able to defend profit margin at 6.9 percent year-on-year at the end of the third quarter. This means it succeeded in matching cost savings from interest and operating expenses with the increase in loan impairment expenses. Its profit margin is however a decline from the closing mark of 9 percent for 2019 – the highest in four years.
Return on assets
The bank ended the third quarter operations with return on assets of 0.7 percent, which is a decline from 0.9 percent at the end of the preceding financial year. It ranks high on asset turnover but its drawback continues to be its comparatively low profit margin.