Stanbic IBTC Holdings Plc followed an aggressive path in asset expansion in 2020 and how to grow earnings to match that level of balance sheet expansion posed a major challenge to management in the year. The bank closed the third quarter operations with a balance sheet size of N2.5 trillion, which is a top speed growth of 37 percent over the 2019 closing figure.
With that, the bank registered one of the most rapid balance sheet size expansions in a decade in the 2020 financial year. It is equally one of the highest expansions of bank balance sheets in the banking industry here last year.
In line with the industry trend in the year, balance sheet growth tilted to the side of low yielding liquid assets. Cash and bank balances led asset expansion for Stanbic IBTC Holdings to stand at N930 billion at the end of the third quarter. This is an advance of 103 percent over the period representing more than 36 percent of the balance sheet.
The principal income yielding assets -loans and advances lagged behind at an increase of 7 percent to N572 billion over the period. Generally rising credit losses alongside the Covid-19-induced economic difficulties appear to have warranted the bank’s lending caution in the year.
The other growth driving assets are financial investments that swelled by 85 percent to N288 billion and trading assets that rose by 31 percent to N326 billion at the end of the third quarter.
The bank’s asset expansion was funded by an increase of 42.5 percent in total deposit portfolio to N1.3 trillion at the end of the third quarter. Deposit growth was driven by due to banks, which more than doubled to close at N511 billion at the end of the period.
The asset structure that limited the growth of customer credit constrained interest earnings during the year. Interest earnings headed downward across the three quarters of the year, dropping by 10 percent year-on-year to N82 billion at the end of September 2020.
Non-interest revenue made up for the shortfall in interest earnings with an increase of 20 percent year-on-year to stand at over N98 billion at the end of the third quarter. The spur came from trading income, which displaced interest earnings as the principal income line for the bank in the year.
Non-interest income accounted exclusively for the improvement in gross earnings as well as profit the bank reported at the end of the third quarter operations. It provided close to 54 percent of gross earnings at the end of the third quarter.
An improvement of 4 percent in gross earnings year-on-year to over N183 billion is however nothing compared to the 37 percent expansion in asset base. That sent asset turnover declining from 0.13 at the end of 2019 to 0.09 at the end of the third quarter in September 2020.
Stanbic IBTC Bank’s management did not let the weakness in revenue hinder profit growth over the review period. It defied the tight earnings situation and achieved a 19 percent advance in after tax profit to N66 billion at the end of the third quarter.
The ability to grow profit far ahead of gross earnings came from cost savings – which was led by cost of funds. Interest expenses went down by more than 20 percent to N25.7 billion at the end of the third quarter. This is well ahead of the drop in interest income, which afforded the bank significant cost saving.
The drop in cost of funds is more than twice the decrease in interest income over the same period. Yet the bank still lost net interest income – which went down by 4 percent to close at N56 billion in September.
Stanbic IBTC Holdings gained a major drop in the average cost of funds during the review period. The drop in cost of funds is against the increase of 42.5 percent in total deposits at the end of the third quarter.
The proportion of interest earnings claimed by interest expenses declined by 31 percent at the end of September 2020. This enabled the bank to record a moderate drop in net interest income.
Some cost saving also came from a marginal decline in operating expenses to N70.8 billion at the end of September. This enabled management to maintain operating cost margin at 38.6 percent – one of the lowest in the banking industry.
Rising credit loss charges defied management’s cost controls and surged up from a marginal net write back of N90 million in the same period in 2019 to N7 billion at the end of the third quarter. That was already more than four times the N1.6 billion net loan impairment expenses the bank recorded in the entire 2019 financial year.
The good news for the bank is that the cost saving from interest expenses was good enough to counter the upsurge in credit loss expenses and still enable substantial profit improvement. The bank ended the third quarter operations of the 2020 financial year with an after tax profit of N66 billion. This represents a year-on-year growth of 19 percent from just 4 percent improvement in gross earnings.
The drop in interest expenses against the improvement in gross earnings made a gain in profit margin possible. Net profit margin improved from 31.5 percent in the same period in 2019 to 36 percent at the end of the third quarter. This is the highest profit margin that the bank has seen in a decade and one of the highest in the Nigerian banking space.
Return on assets
Stanbic IBTC Holdings achieved a return on assets of 3.2 percent, which is a decline from 3.9 percent at the end of the 2019 operations. The ability to raise profit margin that much from only a moderate improvement in revenue is the key strength in operations the bank’s management mustered last year. Increased ability to convert revenue into profit helped it counter the decline in the ability to convert assets into revenue.