GCR Affirms Sterling Bank Plc’s rating of BBB(NG); outlook Stable

08 Jul 2019 In Rating Notifications

GCR Affirms Sterling Bank Plc’s rating of BBB(NG); outlook Stable

Lagos Nigeria, 08 July 2019 - Global Credit Ratings has affirmed the national scale credit ratings assigned to Sterling Bank Plc of BBB(NG) and A3(NG) in the long term and short term respectively; with the outlook accorded as Stable. The ratings are valid until June 2020.


RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Sterling Bank Plc (“Sterling” or “the bank”) based on the following key criteria:

Sterling ranks among the mid-sized commercial banks in Nigeria, in terms of balance sheet size and geographical spread across the country. The bank’s market share is estimated at 2.9% by total industry assets at FY18.

Sterling’s shareholders’ funds declined 3.8% to N97.8bn at FY18, underpinned by increase in regulatory risk reserves and the impact of IFRS 9 adoption. This notwithstanding, an additional N34.5bn raised in Tier 2 capital during the year accelerated total capital by 22.7% to N140.8bn at FY18 and translated to an increase in risk weighted capital adequacy ratio of 13.4% (FY17: 12.0%) above the regulatory minimum of 10% prescribed for the bank’s licence category. To further strengthen capitalisation and enhance operation, the bank intends to issue a new tranche of the existing bond programme in 3Q FY19.

Sterling’s asset quality indicators weakened further in FY18, with the gross non-performing loan (“NPL”) ratio ending at 8.7% (FY17: 6.2%), above the peer group average (6.4%) and the stipulated regulatory minimum of 5%. NPLs increased by 44.9% to N55.7bn in FY18, despite write-offs totaling almost N12.9bn during the year and the impact of the full implementation of IFRS 9, which saw some newly classified loans, (mostly in the oil and gas services and real estate sectors). Consequently, the bank’s provision coverage declined at FY18, covering the impaired loans by just 35.4% (FY17: 50.7%). NPL ratio remained at similar range (8.9%) at 1Q FY19.

Pressure on liquidity was evident in FY18, with the bank’s statutory liquidity being at the minimum level at some points during the year, although rebounding to a comfortable level at year end. Furthermore, a matching of assets/liabilities maturities at FY18 showed cumulative liquidity gaps across the ‘less than 12 months’ maturity buckets. The liquidity gap stood at N294.2bn in the ‘less than 3 months’ maturity bucket and equated to 2.1x capital at FY18.

Sterling reported a pre-tax profit of N9.5bn in FY18 (FY17: N8.1bn), on the back of a robust revenue growth. Although there was an increase in operating expenses during the year, with a corresponding rise in cost ratio to 81.4%, the bank’s key profitability metrics remained strong, with ROaE improving to 9.2% from 8.6% while ROaA remained flat at 0.9%.

Upward movement in the rating(s) or outlook could result from sustained improvement in the bank’s profitability, asset quality, capital and liquidity metrics, as well as an enhanced competitive position. Conversely, a rating downgrade could arise from a weakening in the competitive positioning and sustained pressure on liquidity metrics and asset quality.


NATIONAL SCALE RATINGS HISTORY

Initial rating (April 2009)
Long term rating: BBB(NG)
Short term rating: A2(NG)
Rating outlook: Stable


Last Rating (June 2018)
Long term rating: BBB(NG)
Short term rating: A3(NG)
Rating outlook: Stable


ANALYTICAL CONTACTS

Primary Analyst
Adeyinka Olowofela
Credit Analyst
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Committee Chairperson
Dave King
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Sterling rating reports (2009-18)
Glossary of Terms/Ratios (February 2016)


RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLI WEB SITE AT:  HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE ON THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT www.globalratings.com.ng.


SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

The ratings were solicited by, or on behalf of, Sterling Bank Plc, and therefore, GCR has been compensated for the provision of the ratings.

Sterling Bank Plc participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of info received was considered adequate and has been independently verified where possible.

The credit ratings above were disclosed to Sterling Bank Plc with no contestation of/changes to the ratings.

The information received from Sterling Bank Plc and other reliable third parties to accord the credit rating included the latest audited annual financial statements as at 31 December 2018 (plus four years of comparative numbers), latest internal and/or external report to management, full year budgeted financial statements for 2019, most recent year-to-date management accounts to 31 March 2019, reserving methodologies and capital management policies. In addition, information specific to the rated entity and/or industry was also received.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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