Sterling Bank strengthens financial position as asset quality improves amid Covid-19 shocks

The financial position of Sterling Bank Nigeria Plc has strengthened as asset quality improved (NPLS) even amid the coronavirus pandemic and cratering oil price that threw the economy into a tailspin.

For the first six months through June 2020, Sterling Bank’s NPLS stood at 2.10 percent- lower than the 5 percent regulatory benchmark- which compares with 12 percent in the corresponding period of 2017.

The improvement in asset quality amid harsh regulatory environment belie the prospect of accelerated profit growth in the future.

Also, low NPLS shows the lender isn’t susceptible to default risk, which underpins its credit ratings.

Analysts are of the view that improved provisions and expected recoveries from multiple accounts should help improve investor confidence towards Sterling Bank.

Nigerian banks have more to worry about at the moment as the coronavirus pandemic and collapse of global oil price triggered currency devaluation, thus exposing them to more risk.

The business lull or capital market tailpin revives the dark memory when the sharp drop in oil price of mid-2014 tipped the country into a recession in 2016. Consequently, customers were unable to pay interest on money borrowed from financial institutions. That balloon NPLS and led to the collapse of Skye Bank Plc and Diamond Bank Plc, which were bought by Access Bank in 2019.

The World Bank disclosed in its latest World Bank Nigeria Development Update that Nigerian banks are now faced with serious risks of destabilisation, no thanks to what was aptly described as “the COVID-19 shock”.

The World Bank stated in the report that the pandemic could erode the generally positive performance recorded by the banks in 2019.

The Bank added that in specific terms, there is the risk of resurgence in banks’ non-performing loans (NPLS), especially as it pertains to loan exposure to the country’s and gas sector.

“The COVID-19 shock poses serious risks to the financial sector, as mounting pressures in Nigeria’s external sector and the intensifying stress in global financial markets threaten its stability,” said the Bank.

“The economic downturn and the collapse of global oil prices will likely reverse the declining trend in banking sector NPLS, starting with loans to the oil sector, which represent almost 30 percent of private-sector credit, and progressing through the remaining sectors as demand weakens,” summed the Bank.

Further analysis of the financial statement of Sterling Bank shows net income increased by 10.09 percent to N33.48 billion as at June 2020 as against N30.41 billion the previous year.

Sterling Bank has minimized operating expenses while contemporaneously magnifying profit as cost to income ratio reduced to 72.60 percent in the period under review from 79.20 percent the previous year.

Its operating income grew by 9.08 percent to N44.26 billion in the period under review as against N40.59 billion the previous year.

Analysts and investors have divergence of opinion over the decision of the Central bank of Nigeria (CBN) to hike the Cash Reserve Ratio (CRR).

At the end of the first Monetary Policy Committee (MPC) meeting for the year, which was concluded on 24 January, the committee decided to hike the Cash Reserve Ratio (CRR) by 5% to 27.5% while maintaining status quo on other key policy parameters ( MPR; 13.5%, Liquidity ratio; 30%, Asymmetric corridor; +200/-500 basis points).

Abubakar Suleiman, managing director of Sterling Bank, said that the central bank’s decision to increase the CRR will not negatively impact the profitability of banks.

Cash Reserve Ratio (CRR) is the share of a bank’s total deposit that is mandated by the CBN to be maintained with the latter in the form of liquid cash.

CRR is one of the main components of the central bank monetary policy, which is used to regulate the money supply, level of inflation and liquidity in the country. The higher the CRR, the lower is the liquidity with the banks and vice-versa.

“The increase in CRR during the pandemic itself is actually marginal, so we were already at 22.5 percent prior to the pandemic.so the real increase between 22.5 and eventually to 27.5 is five percent,” said Suleiman

“Beyond the fact that it represents a significant accumulation of liquidity that has not yet been deployed, which means that the banks increasingly have access to liquidity if they ever need it, it would be a squeeze on profitability to the extent that what goes into CRR cannot go into treasury bills or bond,” Suleiman added.

However, global rating agency Fitch, has warned that the central bank decision to raise the amount of money in which commercial banks park in its coffer at zero interest, is credit negative for the sector.

Fitch noted the move would restrict commercial banks’ ability to lend and dampen their productivity.

“The Central Bank of Nigeria’s ( CBN’S) decision, designed to reduce excess banking sector liquidity in an attempt to curtail high inflation, clashes with its competing objective to stimulate lending,” Fitch said Wednesday.

The move has raised dust across fronts from analysts who said it contradicts the regulator’s July 2019 policy forcing commercial banks to lend at least 65 percent of their deposits to boost economic growth.

So far, unaudited 6-months earnings for 2020 of Fist Bank Holdings and First City Monument Bank points to slow growth in profit, lower growth interest income, and rising impairments of financial asset.

Analysts are of the view that 2020 will test the resilience of the Nigerian banking sector in the mist of uncertainties.

“We note that the capacity of the banks to weather the storm is peculiar for each of the banks, said analysts at United Capital Ltd .

“Banks that have the holding company structure such as Stanbic IBTC, FCMB and FBNH are better positioned due to the multiplicity of their revenue streams,” said the analysts.

“In the same vein, banks that have a net dollar long position such as Zenith Bank and Guaranty Trust Bank are at an advantage, due to the devaluation and possible further devaluation of the naira. In terms of asset quality, we observe the move by banks to restructure loans across affected sectors (especially upstream Oil & Gas and Sub-nationals) while increasing loan origination in Agro-allied, Telecoms and related sectors,” they summed.