Sterling Bank Plc 2015 FY: Sustained Positive Momentum Amidst Harsh Operating Environment

LAGOS, Nigeria, Capital Markets in Africa — Sterling Bank Plc (“Sterling” or “the Bank”) today (March 21, 2016) published its audited FY:2015 result on the floor of the Nigerian Bourse recording positive growth in both top and bottom lines and the first Tier-2 Bank to publish its FY:2015 earnings. We present the highlights of the result and our FY:2016 estimates.
 
Gross Earnings up 6.3% Y-o-Y…Lifted by Non-interest income
Sterling sustained its fine form since the acquisition of Equatorial Trust Bank in 2011 (4-Year gross earnings CAGR: 34.0%) to record another positive Y-o-Y growth in FY:2015 despite the unsettled operating environment. The Bank posted a 6.3% Y-o-Y growth in gross earnings from N103.7bn in FY:2014 to N110.2bn in FY:2015, 3.0% lower than our N113.6bn forecast for FY:2015. This was on the back of impressive growth in net trading income (income from bonds trading up 2,652.3% to N4.1bn in FY:2015) and other operating income (gains on disposal of PPE of N1.3bn), resulting to a 13.7% Y-o-Y rise in non-interest income in FY:2015. Contrary to other banks that have published their FY:2015 results so far, Sterling recorded an impressive Q4:2015 gross earnings of 6.0% Q-o-Q, however, a 7.4% Y-o-Y decline. This was attributed to 21.6% Q-o-Q growth in loans & advances in Q4:2015.
 
PAT Rose 14.3% Y-o-Y…Bolstered by Significantly Lower Effective Tax Rate
Similarly, the Bank recorded a 2.8% and 14.4% Y-o-Y rise in PBT and PAT to N11.0bn and N10.3bn in FY:2015 from N10.7bn and N9.0bn in FY:2014, 2.7% and 8.4% (variance due to significantly lower effective tax rate) higher than our forecast of N11.3bn and N9.5bn for 2015 respectively. We observed a significant drop (58.5% Y-o-Y) in income tax expense traceable to the utilization of unrelieved losses brought forward (N2.1bn) in 2015 resulting to an effective tax rate of 6.6% in FY:2015 from 16.2% in FY:2014. On a Q-o-Q basis, Sterling recorded an inspiring Q-o-Q growth in Q3:2015 (40.2%) and Q4:2015 (29.4%) to reverse the poor performance in Q2:2015 (-61.3%). Also, the Bank’s PBT and PAT margins settled at 10.0% and 9.4% in FY:2015, 0.3% lower and 0.7% higher than previous year respectively.
 
Cost to Income Improves Slightly… CoF spiked to 6.3% in 2015
Sterling’s Cost to Income Ratio (CIR) improved to 72.2% in FY:2015 from 73.6% in 2014 due to a marginal drop (1.9%Y-o-Y) in OPEX as operating income closed flat. The Bank’s NIM and CoF reflected the competitive environment in 2015 as interest expense surged 18.5% Y-o-Y. Consequently, NIM deteriorated to 5.7% in FY:2015 from 6.9% in the preceding year while CoF spiked to 6.3% in FY:2015 from 4.9% in 2014.  
 
Risk Assets down 7.1%Y-o-Y in FY:2015…CoR inch up to 1.9%
The Bank reversed previous year growth (FY:2014 – 7.7%) in loans & advances to record a 7.1% decline Y-o-Y in 2015 which management linked to the restructuring of State Government loans. As a result, net loan book closed at N407.5bn in FY:2015 resulting to a rise in loans to deposits ratio of 71.6% – lower than recommended  regulatory limit of 80.0%- from 68.3% in FY:2014. The Bank’s impairment charges rose 10.3% Y-o-Y to N8.2bn in 2015 (3.7% lower than Afrinvest FY:2015E – N8.5bn) relative to N7.4bn in the corresponding year. Consequently, CoR increased to 1.9% in FY:2015 from 1.6% in FY:2014. Sterling’s total deposits dipped 9.9%Y-o-Y (vs. 15.0% Y-o-Y in 2014) to N590.0bn in FY:2015 from N655.9bn in 2014 also attributed to the implementation of Treasury Single Account (TSA) policy in Q3:2015 – 8.7% Q-o-Q decrease. Worthy of note is the significant improvement in Sterling’s CAR from 13.6% in FY:2014 to 17.5% in FY:2015.
 
Proposes 9 Kobo…Dividend Yield Settles at 5.2%
Sterling’s Management has proposed a dividend of 9 kobo in FY:2015 (vs. N0.06 in FY:2014), resulting to a dividend yield of 5.2% at N1.73 share price (21/03/2016). Closure and payment dates have been fixed for 4^th April 2016 and 19^th April 2016 respectively. 
 
Outlook: Revision to FY:2016 Estimates… Uphold BUY rating
Based on FY:2015 result, Sterling is trading at a trailing P/E and P/BV of 4.8x and 0.4x and a forward P/E and P/BV of 4.5x and 0.7x respectively. On the back of a clearer fiscal policy in H2:2016, we forecast a 10.9% and 8.7% Y-o-Y growth in gross earnings and PAT in FY:2016 relative to initial projection of 5.2% decline and 9.4% increase respectively. We also project a 10.1% and 5.5% Y-o-Y growth in loans & advances and deposits on the back of base effect and a stronger H2:2016. We expect EPS and DPS to settle at N0.39 and N0.11 in FY:2016 respectively. Consequently, we raised our 12-month target price marginally to N2.27 from N2.02 presenting an upside of 31.1% based on share price of N1.73 (21/03/2016). However, we maintain our “BUY” Rating on the Bank.

Source: Afrinvest (West Africa) Limited Research Team