With a full year return of 71.29 per cent in 2012, twice the rate of average return in the Nigerian capital market during the period, Sterling Bank opens today with a year-to-date return of 52 per cent. This is some 19 percentage points above average market return of 333.13 per cent. One of the 30 best-performing stocks in the market for the first half, Sterling Bank ranks within the best-performing stocks in recent years. But intrinsic fundamentals still suggest the bank has stronger upside potential, Taofik Salako reports.
In the past 18 months, equity investors have all smiles. Nigerian equities recorded average return of 35.4 per cent in 2012. The full-year return in 2012 implied accretion of some N2.44 trillion in capital gains to investors during the 12-month period. The market opens today with a year-to-date average return of 32.94 per cent. Average market return is denoted by the All Share Index (ASI) of the Nigerian Stock Exchange (NSE), a value-based index that tracks all equities on the Exchange. Besides its primary importance as benchmark for the NSE, ASI doubles as the country index and relates average value at the stock market.
All through, Sterling Bank has remained substantially above market average. Its share price appreciated by 71.29 per cent in 2012, pushing through opening price of N1.01 and a low of 80 kobo to close at N1.73. At the opening price of N2.63 per share, the current market consideration implies a year-to-date return of 52 per cent. This represents one of the highest returns in the banking sector. The performance of Sterling Bank is further highlighted by the fact that lenders generally are running behind the market with the NSE Banking Index opening today with a year-to-date return of 23.77 per cent.
For long-term investors and speculative traders, Sterling Bank presents substantial returns. For traders who had anticipated the pricing trend and the opportunity that might come with additional allotment through the ongoing rights issue, they have a lump-sum three-in-one return. Besides the capital gains of 52 per cent in the past 28 weeks and the dividend yield of 11.6 per cent, the pre-allotted shares now offer additional return of 24.1 per cent, given the rights issue price of N2.12 per share, the market price and opportunity for trading of rights on the NSE. With inflation rate at 9.0 per cent and Monetary Policy Rate (MPR) of the Central Bank of Nigeria (CBN), which sets the benchmark for lending rate at 12 per cent; investment in the bank’s shares still presents substantial net return, even when adjusted for inflation and cost of capital. Such returns, such as Sterling Bank’s, are what have kept foreign portfolio investments scrambling into the Nigerian capital market, in spite of obvious macroeconomic and political challenges.
For shareholders and long-term investors, Sterling Bank appears more like the proverbial golden hen that lays to meet the current needs and still subsists for future needs. While continuous improvements in fundamental performance and returns have seen quantum leap in shareholders’ value, such as the capital gains in the past 18 months and 100 per cent increase in last dividend payout, steady implementation of the bank’s medium-to-long-term growth strategy reinforces the sustainability of such growth and return.
Symmetrical values
Sterling Bank’s technical performance at the stock market appears to be rooted in similar performance in the fundamentals of its business operations. This is the norm for share pricing. While the arguments subsist on the time-lag and immediacy of stock market pricing efficiency, there is conclusive unanimity on the fact that share price trend will tend to reflect the fundamentals of the stock overtime. The differing nature of efficiency response time- depending on the nature of the market, investors, technologies etc, is what makes for overvaluation, undervaluation and fair value of each stock and the entire market sometimes. These are the underlying variables for continuous stock market corrections and cycles. It is within these cycles and corrections-within stocks and markets; that speculative investors make money from. For long-term investors and shareholders, the intrinsic value lies in the ability of the stock to create and sustain substantial values over the cycles and corrections. This appears to be attraction of Sterling Bank.
Audited and interim earnings reports have shown appreciable growths over the years, underlining the consistency of the bank’s fundamentals in its transition from a small-size low-tier bank to an expansive mid-tier bank. Audited report and accounts of Sterling Bank Plc for the year ended December 31, 2012 showed that gross earnings rose by 44 per cent from N47.7 billion to N68.86 billion. Profit before tax, on the face of it, rose by 33 per cent from N5.46 billion to N7.5 billion. When adjusted for the sale of subsidiaries in previous year, pre-tax profit from core operations actually doubled from N3.6 billion to N7.5 billion. Also, while tax write-backs of N1.3 billion had boosted net profit to N6.91 billion, the bank paid taxes of N546.11 million for 2012 and still increased net profit after tax to N6.95 billion. With earnings per share at 44.3 kobo, the bank doubled cash dividend from 10 kobo paid for 2011 business year to 20 kobo for 2012. The sustainable dividend outlook was still appreciable with dividend cover of 2.22 times in 2012. At the opening price for this year, the dividend per share implied a dividend yield of 11.6 per cent, one of the highest in the market.
Besides, the audited report had shown continuing disciplined growth in business expansion and credit risks management. Both the structure and quality of risk assets improved considerably during the year. While gross loans and advances grew by 38 per cent from N171.47 billion to N236.13 billion, classified loans dropped by about 29 per cent from N9.4 billion to N6.7 billion. The proportion of non-performing loans to total loans and advances thus halved from 5.5 per cent in 2011 to 2.8 per cent in 2012, significantly surpassing industry’s benchmark target of 5.0 per cent.
The current earnings report shows increasingly positive outlook. Interim report and accounts for the three-month period ended March 31, 2013 showed that profit after tax rose by 96 per cent while profit before tax increased by 85 per cent. In three months, gross earnings stood at N19.84 billion as against N16.21 billion recorded in comparable period of 2012. Profit before tax jumped from N1.63 billion to N3.02 billion while profit after tax leapt to N2.72 billion as against N1.39 billion. The report underlined continuous improvement in the bank’s cost efficiency and growing market share. Pre-tax profit margin was 15.2 per cent in first quarter 2013 as against 10.1 per cent in comparable period of 2012. Deposits increased by 13.1 per cent within the three months from N466.85 billion recorded in December 2012 to N528.10 billion in March 2013. Total assets grew by 11 per cent to N645.07 billion as against N580.23 billion recorded in December 2012.
Better than average
Sterling Bank’s first quarter net profit growth signaled robust returns outlook for investors as earnings per share rose by 89 per cent from 9.0 kobo recorded in first quarter 2012 to 17 kobo in first quarter 2013. This places the bank within the top three banks with the probable earnings yield. While actual dividend payout and related dividend yield depends on the board of directors’ recommendation and approval of the shareholders at the general meeting, earnings yield is the fundamental basis for dividend payout and intrinsic value-creating potential of a stock. Earnings and dividend yields relate a company’s fundamental earnings to its share price within a specified period. Both however, depend on the entry cost of the investor. At current market consideration, Sterling Bank’s earnings-potential return outlook outweighs most stocks in the banking subsector. The lender opens today with earnings yield of 6.5 per cent. Against the discounted rights issue’s price of N2.12, the bank’s earnings yield trended upward to 8.0 per cent. Average earnings yield in the banking subsector is about 5.0 per cent. Only six banks rank above average with Unity Bank and Sterling Bank posting the highest yields. Unity Bank opens with a yield of 8.6 per cent. Zenith Bank carries a yield of 3.6 per cent. Ecobank transnational Incorporated (ETI) opens with a yield of 3.3 per cent while Stanbic IBTC Holdings opens with the lowest yield of 2.1 per cent, based on available earnings reports.
Strengthening growth base
In spite of the above-average upside potential, Sterling Bank is looking to strengthen its competitiveness and fundamental performance through additional capital. Riding on the back of successful integration of the acquired Equitorial Trust Bank (ETB) Limited, the emergent Sterling Bank seeks to consolidate its nationwide spread and operations with injection of new equity and debt capital. According to the new capital issue agenda, the bank plans to raise $80 million through rights issue and $120 million through private placement.
Sterling Bank is currently raising N12.5 billion through a rights issue of about 5.889 billion ordinary shares of 50 kobo each at N2.12 per share, 30.5 per cent discount to this year’s high of N3.05 at the stock market. The shares have been pre-allotted on the basis of three new ordinary shares of 50 kobo each for every eight ordinary shares of 50 kobo each held as at May 20, 2013. Application list, which opened on June 24, 2013, will run till July 31, 2013.
The rights circular indicated that the net proceeds of the rights issue, estimated at N12.13 billion, would be used mainly to finance branch expansion and increase working capital. Part of the net proceeds would also be used for infrastructure upgrade in support of automated and cashless payment as well as to enhance information technology.
According to the breakdown of utilization of net proceeds, 35 per cent of the net proceeds, estimated at N4.24 billion, would be used for branch expansion; 15 per cent of the funds estimated at N1.82 billion would be used for infrastructure upgrade, 10 per cent of the funds equivalent to N1.21 billion for information technology and the largest chunk of 40 per cent, estimated at N4.85 billion, is billed to be set aside as additional working capital.
Shareholders’ support
Early filings from receiving agents and expressions of interests by several key stakeholders showed enthusiastic start for the rights issue. The success of the rights issue is primarily assured by the commitments of major shareholders. While four core investors hold about 35 per cent equity stake, 193 shareholders altogether hold the decisive 83.1 per cent equity stake. The supports from non-core shareholders have further strengthened the prospects for the rights issue, which had earlier received firm commitments from major Nigerian and foreign shareholders including the State Bank of India, Dr. Mike Adenuga, Suleiman Adegunwa’s Ess-ay Investments Limited and others. Sterling Bank’s non-core shareholders, with less than five per cent equity stake, include a large number of minority retail shareholders of more than 88,000. Most of the shareholders’ groups that represent small-holding retail investors have publicly expressed supports for the rights issue. These included Sir Sunny Nwosu’s National Coordinator, Independent Shareholders Association of Nigeria (ISAN); Dr Faruk Umar’s Advancement of Rights of Nigerian Shareholders (AARNS); Boniface Okezie’s Progressive Shareholders Association of Nigeria (PSAN); Gbenga Idowu’s Shareholders United Front (SUF); and Mrs. Bisi Bakare’s Pragmatic Shareholders Association.
A window to the future
Managing director, Sterling Bank Plc, Mr. Yemi Adeola, said the ongoing rights issue and other capital raising exercises were meant to support the bank’s next growth agenda, which is aimed at consolidating its stable performance over the years and enhance its competitiveness in terms of size and resilience to macroeconomic changes. According to him, additional capitalisation has become necessary because size has become increasingly important and relevant in the banking industry and the extent of capital base could be a limit to expansion in terms of physical presence and operations.
He pointed out that additional working capital would enable the bank to expand the scope of its corporate banking business, noting that the bank is currently limited by the single obligor limit, which is a function of available capital base.
“If with the modest capital that we have, we were able to stabilise the bank, deliver consistently better returns to shareholders and build up to become the a top tier bank. Imagine what we would do with more capital. Our shareholders have no reason whatsoever not to be excited in participating in the rights issue. You can’t regret it,” Adeola had assured.
Four-year forecasts for the bank showed continuous growths in the top-line and bottom-line over the next four years. Profit forecasts reviewed by capital market regulators and professional parties showed that gross earnings will rise steadily from N87.22 billion in 2013 to N115.23 billion, N147.2 billion and N188.82 billion in 2014, 2015 and 2016 respectively. Profit after tax is expected to grow by about 71 per cent to N12 billion in 2013 and thereafter to N15.1 billion, N22.28 billion and N35.19 billion in 2014, 2015 and 2016 respectively. While it will plough back the larger chunk of retained earnings into reserves, cash dividend is expected to increase from N2.4 billion in 2013 to N3 billion in 2014 and thereafter to N4.46 billion and N7.04 billion in 2015 and 2016 respectively.
Farsightedness, stable management, long-term strategic corporate plan and corporate goodwill are mitigating factors against country and industry risks of policy summersaults, corporate governance issues and heterogeneous external and domestic changes that tend to reshape the Nigerian financial services industry. In all these, Sterling Bank appears to be in better stead.
