With a full-year return on equity of 71.29 per cent in 2012, twice the rate of average return in the Nigerian capital market during the period, Sterling Bank Plc has rewarded investors adequately, writes, Eromosele Abiodun
The Nigerian stock market posted average full-year return of 35.4 per cent in 2012. This implied accretion of some N2.44 trillion in capital gains to investors in 2012.
The All Share Index (ASI), the common value-based index that tracks changes in prices of all quoted companies, closed 2012 at 28,078.81 points as against its opening index of 20,730.63 points for the year. Aggregate market capitalisation of all quoted equities also rose from its opening value of N6.533 trillion to close the year at N8.974 trillion, indicating capital gains of N2.44 trillion. The bulk of the returns on the NSE came from the NSE-30 (30 most capitalised stocks) selected stocks with 44.61 per cent YTD return. The food and beverages sector led with a return of 42.27 per cent followed by the banking sector with a 23.91 per cent return.
Among the many stocks in the banking sector that have gladdened the hearts of investors is Sterling Bank Plc. In nearly 14 months, investors have earned more than 177 per cent gain on Sterling Bank Plc. While the general recovery at the Nigerian stock market has seen substantial increases in values of quoted companies, some stocks have been quite exceptional. Sterling Bank has proven to be an outstandingly bullish stock since 2012.
Sterling Bank's market consideration appreciated by 71.29 per cent in 2012, pushing through the opening price of N1.01 and a low of 80 kobo to close at N1.73. This overrode the negative return of 56.28 per cent recorded in 2011.
Sterling Bank also started this year with a sprint, opening last week with a year-to-date return of 61.85 per cent, more than 43 percentage points above ASI's return of 18.45 per cent. This represents one of the highest returns in the banking sector. Banks generally are running ahead of the market. The NSE Banking Index closed last Friday with a year-to-date return of 30 per cent.
However, in spite of the significant capital gain in recent period, Sterling Bank's share price still appears to be lagging behind fundamental performance. From the rubbles of the banking crisis, the bank emerged with improving operational earnings.
Latest operational report showed almost a double in gross earnings and 64 per cent increase in profit after tax. Interim report and accounts of the bank for the third quarter ended September 30, 2012 showed substantial growths across key performance indicators, improving prospects for considerable improvement in dividends for the business year.
The report indicated 92.6 per cent growth in gross earnings, underlining the success of the lender's bank-focused business strategy. Interest income had doubled by 109.9 per cent while net interest income jumped by 84 per cent. Profit before tax thus rose by 58.5 per cent.
Sterling Bank grossed N50.74 billion by third quarter 2012 as against N26.35 billion recorded in comparable period of 2011. Interest income leapt to N39.56 billion in 2012 compared with N18.85 billion in corresponding period of 2011. While interest expenses increased from N8.97 billion to N21.37 billion, net interest income also nearly doubled from N9.88 billion to N18.19 billion. Non-interest income increased by 49 per cent to N11.2 billion from N7.5 billion recorded the previous year. Altogether, operating income rose by 78 per cent from N15.9 billion to N28.3 billion.
Consequently, profit before tax jumped from N3.01 billion to N4.77 billion. After taxes, net profit distributable to shareholders increased from N2.74 billion to N4.49 billion.
Besides, the report showed strong and quality balance sheet with growing deposit base and increasing lending activities underpinned by reduction in the proportion of non-performing loans to total loans from 4.8 per cent in December 2011 to 2.4 per cent by September 2012. Customers' deposits increased from N392.05 billion to N433.98 billion. Loans and advances similarly improved from N164.3 billion to N229.43 billion. Total assets also rose to N564.06 billion from N504.72 billion.
Earnings analysis showed earnings per share of 29 kobo for third quarter 2012 compared with 22 kobo in similar period of 2011. Annualised, earnings per share could be about 39 kobo for the 2012 business year. However, further consolidation in the fourth quarter could lead to higher full-year earnings. At current share price, the net earnings indicated strong double-digit returns for Sterling Bank.
Current earnings yield, based on the third quarter report, stands at 10.4 per cent. This could extend to about 14 per cent at the conservative annualised rate. Sterling Bank's earnings and probable dividend yields are within the most attractive bracket for the banking industry, especially within the mid-tier category.
A strong performance for 2012, barring any untoward development in the fourth quarter, would steady the growth trajectory of Sterling Bank, which had pulled through 2011 with appreciable growths in the top-line and the bottom-line. Audited report and accounts of the bank for the year ended December 31, 2011 had showed robust growths in incomes and profitability as well as improvements in assets quality and returns. Gross earnings rode on the back of 110 per cent growth in non-interest income and 23 per cent growth interest-based incomes to N45.2 billion in 2011 as against N30.4 billion in 2010, indicating an increase of 49 per cent.
Interest income had increased from N24.5 billion in 2010 to N30.2 billion. Operating income also grew by 32 per cent to N27.0 billion in 2011 compared with N20.4 billion in 2010. Profit after tax and extra-ordinary income thus jumped by 60 per cent to N6.7 billion in 2011 as against N4.2 billion in 2010.
The bank emerged with a stronger and healthier balance sheet as the proportion of bad loans to total loans and advances surpassed the Central Bank of Nigeria's (CBN)'s industry target of 5.0 per cent at 4.8 per cent. Non-performing loans had stood at 10.7 per cent of gross loans in 2010.
Sterling Bank's total balance sheet nearly doubled from N259.6 billion in 2010 to N504.4 billion in 2011. Total deposits doubled by 104 per cent to N406.5 billion as against N199.3 billion while the bank expanded its risks assets as net loans and advances rose by 60 per cent to N163.5 billion from N101.9 billion in 2010. Shareholders' funds also grew by 56 per cent from N26.3 billion to N41.0 billion. Sterling Bank had distributed a dividend per share of 10 kobo for the 2011 business year. Earnings per share had stood at 51 kobo in 2011 as against 33 kobo in 2010. The payout for 2011 had implied a dividend cover of 5.10 times. The dividend payout for 2011 has been used as baseline for projection of possible cash payout for the 2012 business year.
Banking Sector Outlook
But several investors are still cautious about the outlook for the banking sector. Beyond the improving fundamentals of banks, there are still palpable fears of policy summersaults, corporate governance issues and heterogeneous external and domestic changes that tend to reshape the industry.
While several analysts' reports have underlined the relative undervaluation of the Nigerian banking industry compared with other emerging markets, the reins on industry's revaluation are macroeconomic and industry policy risks. But farsightedness, stable management, long-term strategic corporate plan and corporate goodwill could mitigate the adverse impact of any unforeseen change on a bank's long-term performance.
Sterling Bank appeared to be in better stead than several banks in terms of stable management, corporate planning and goodwill. Already, the bank has outlined eight-year plan strategic growth plan aimed at building a globally competitive financial franchise with strong fundamental performance and sustainable returns to shareholders. The 2011-2019 strategic growth plan details key identifiable goals and parameters for measuring performance of the bank, giving a directional outlook for year-on-year assessment of management performance.
Overall, the bank plans to build a fully- scaled business model with institutionalised processes that will endure beyond the stewardship of current owners and management while transforming into a systemically important operator that impact significantly on all segments of its business over the long period.
Within the immediate future, Sterling Bank's fundamental targets include double digit annual growth in gross earnings, diversified income streams with leading positions in all segments of operations as well as a diverse retail funding base.
Besides, the bank said it would strive to keep non-performing loans below five per cent of gross loans and advances, focus on single-digit cost of funds and consolidate on products and services that would make the institution the consumer banking franchise of choice to customers. Some of the key performance indices to measure the feat of the bank include return on average equity, non-performing loan/gross loan ration, cost-to-income ratio, revenue growth, loan growth, deposit growth, total assets, sources of funding and capital adequacy among others.
Commenting on the strategic outlook of the bank, its Managing Director, Mr. Yemi Adeola, said: "The outcome we seek is to become the financial institution of choice through the creation of exceptional value for all our stakeholders: employees, shareholders, customers, business, communities where we operate, partners, vendors, the financial services industry and the country as a whole."
He said the bank's performance so far reflected the continuing success of its strategic growth initiatives as it continued to draw benefits from the seamless integration of Equitorial Trust Bank. According to him, Sterling Bank has been well-positioned to capture emerging growth opportunities with customer-centric approach to financial services and products.
He assured that the bank would consolidate on the progress made so far and sustain its drive towards building retail deposits with a view to achieving its corporate goals.
As investors await the full-year report for 2012 and interim reports for 2013, good earnings outlook could create further headroom for Sterling Bank's share price. With analysts harping on fundamentals as decisive pricing factors going forward, investors would tend to favour stocks with relatively high and stable yields.