Sterling Bank restrategises for holdco structure

With the momentum now shifting in favour of Nigerian banks, migrating to the holdco structure, the question now is who has not moved on.
At the moment, the latest indication of a shift to the holdco platform is from Sterling Bank which is making it clear that it cannot afford to lag behind its peers or lose the opportunities that abound in transiting to a holdco.
The Chief Executive Officer of Sterling Bank Plc, Mr. Abubakar Suleiman who recently announced that the bank has obtained the Central Bank’s approval in principle to enable it restructure as a Holding Company said that in particular, the Bank’s desire to operate as a Holding Company was driven by its plan to spin off its Non-Interest Banking window which became operational in January 2014 into an autonomous entity.
It will be recalled that only recently, the managing Director of GT Bank, Mr. Segun Agbaje told a group of top journalists that indeed some of the most successful banks in the world are holdcos.
He added that it has in fact become trendy to operate a holding company not only for Nigerian banks but also the world over to enable the financial institutions survive and deliver better shareholder value.
Most experts envisage that the benefits accruable to holdcos are the major attraction for more banks that are racing to become holdco’s.
Some of those benefits include minimising tax obligations, central control and concentration of property assets, and they have also been fingered to be part of what firms crave in voting for the more flexible arrangement.
Overall, achieving growth flexibility, development and succession planning have also been known to be better suited to the structure of Holding companies.
These attractions among other benefits have suddenly become trendy in Nigeria, especially among the banks.
A holding company, the experts say is a corporation that owns a controlling interest in one or more banks. However, the technical snag is that the Holdco does not itself offer banking services.
A disclosure notice sent to the Nigerian Stock Exchange by Sterling Bank said the bank believes that the proposed structure incorporates efficiencies around operations and financing efforts that will support the individual businesses in reaching full potential.
With regard to increased portfolio diversification, the bank said the Holding Company structure enables the Non-interest Bank and other non-core businesses achieve greater results based on focused management of the distinct businesses. Similarly, it said there will be improved efficiency resulting from the consolidation of key functions such as Compliance, Risk Management and other support functions, yielding improved prospects for individual business growth.
“Going into the Holding Company structure, our desire is to entrench our business model premised on impact capitalism where we believe that private sector capital and market-based tools will offer the best types of solutions to Nigeria’s most pressing social and environmental challenges,” the bank said.
“The Holding Company gives us the structure to explore our business model further,” the statement added.
It is to be noted that before this current development, Sterling Bank was also caught in the web of the country’s depressed economy as its post-tax profit dipped 2.77% to ₦7.37 billion in Q3 2020.
Interest income was down by 6.72% to ₦88.69 billion from ₦95.08 billion because of revenues from Loan and advances to customers and debt instruments at amortised cost which slipped by 8.76% and 22.93% respectively during this period.
Net Fees and commissions income also shrank 26.21% to ₦7.87 billion in Q3 2020, weighed down by a huge 35.37% contraction in Fees and commissions revenue and e-business income that declined 15.56% during this period.
Sterling Bank, however, made a trading income of ₦7.1 billion for the third quarter ended September 30, 2020, compared with N1.9 billion for the corresponding period of 2019, representing an increase of 264.7 per cent and other operating improved 23.89 to ₦2.46 billion during this period.
While interest expenses were cut down 16.98% to ₦39.48 billion, personnel costs dipped 0.77%, but other operating expenses lowered by 4.84% in Q3 2020.
The lender’s performance was also slowed down by 148.11% rise to ₦9.7 billion which was set aside for credit loss expense on financial assets compared ₦3.91 billion in September 2019.
In his remarks, Mr. Abubakar Suleiman, Managing Director and Chief Executive Officer (MD/CEO) of the bank said, “With economic activity picking up in the third quarter, following the gradual ease in the nationwide lockdown, we continued to leverage on our existing remote work policy to enhance workforce productivity while ensuring uninterrupted service delivery to both existing and new customers”.
The CEO said a 26.2% dip in fee income occasioned by the downward review of electronic banking fees, and slower loan origination due to the protracted lockdown was moderated by a 264.7% spike in trading income.
He said growth in the balance sheet was driven by a 26.5 per cent growth in low-cost funds, which saw the bank’s CASA mix improve to 71 per cent from 60 per cent, delivering a 6.6 per cent growth in customer deposits. Our cash and short-term balances increased in line with the higher regulatory reserves while interest income also declined by 6.7 per cent, which was offset by a 17.0 per cent decline in interest expense. This delivered a 120 bps drop in the cost of funds and, consequently, a 100-bps increase in net interest margin.
Suleiman noted that in terms of asset quality, “We proactively increased our cost of risk by 100 bps to 1.9%, while recording a marginal increase in NPL ratio to 2.9%, well below our target of 5%”
He explained that the decline in OPEX was achieved by moderating administrative expenses despite growth in other operating expenses, including AMCON and insurance fees
The CEO said the bank was able to maintain a strong capital and liquidity position of 16.1 per cent and 32.5 per cent respectively above the regulatory benchmark, adding that overall the bank delivered a profit after tax of N7.37 billion for the 9-month period.
Before then, Sterling Bank Plc had displayed relative performance strength in its 2019 end of year results which showed a 17.2% increase in profit after tax.
Sterling Bank’s gross earnings for the period was N149.4 billion, indicating a 0.5% increase compared to N148.7 billion that was recorded during the same period in 2018.
During the period under consideration, Sterling Bank reported a profit before tax of N10.9 billion, representing a 15 percent increase from N9.2 PBT that was reported during the same period in 2018.
Profit after tax also increased by 17.2% to N10.8 billion, up from N9.2 billion in 2018.
Both basic and diluted earnings per share for the period was put at N0.38, higher than N0.32 in 2018.
The bank has had a mixed performance over the years. It has grown its total assets by 40 per cent from N799.4billion in 2015 to N1.182 trn in 2019. Its gross earning has also grown by 34 per cent in the last five years. Poring through the bank’s books, it was observed that it posted a profit before tax of N11.016billion in 2015, N6.019billion in 2016, N8.039billion in 2017, N9.468billion in 2018 and N10.233billion in 2019.
Commenting on the issue, Managing Director/ Chief Executive of Heritage Capital Markets limited, Chief Chidi Ajaegbu told Business Hallmark that more banks are becoming Holding Companies as a back door gambit of sorts to revert to the universal banking system which was truncated by the Sanusi Lamido Sanusi regime as Governor of the Central Bank of Nigeria (CBN).
The former ICAN boss said the Holdco system however allows the owners of the banks some flexibility to diversify into other areas of business other than banking.
“First and foremost, it gives them the flexibility of diversifying. You know as a bank you cannot own subsidiaries. HoldCos can now own a bank, own registry and other subsidiaries because it gives them the flexibility to get into a whole lot of other things. Besides, as the pioneer chairmen exit their mainstream banking outfits, they sort of need a structure around which they could continue to oversee what the bank is doing.
“So, most Holdco offices would now be in charge of outlining the strategic direction of the banks, oversight functions between companies, and carrying out other wide-ranging oversight functions, including probably auditing as against compliance; focusing more on auditing and compliance and basically protecting the interest of the shareholders and at the same time have a relationship that helps them have oversight on the bank.
So, in addition to having to focus in a very narrow area of oversight function and strategy, because you know that as a bank you cannot diversify into other areas, but the Holdco arrangement gives you the latitude to have oversight of the banks and also the flexibility to go into other areas. In fact, it is a back door approach to reverting to that universal banking system,” Ajaegbu explained.
“The bank can weather the storm of any kind” said Managing Director of High Cap Securities limited.
However, transiting to a holdco is not Eldorado to the banks as there may still be land mines on the way for the banks.
But many experts believe that Sterling Bank possesses what it takes to weather any storm. It has survived these years beyond expectations and even paid dividends despite being an aggregation weak and small financial institutions which did not have a chance of surviving the banking consolidation individually.
The bank has also shown maturity in its succession plan which has proved to be reliable and effective.
In addition also, there is a dominant cross-industry position that the leader of Sterling Bank’s management team, Mr. Abubakar Suleiman is a deep, collected and focused person who is not only in tune with the operational environment, but also knows where and when to take decisive decisions.