GCR Affirms Sterling Bank Rating with Stable Outlook
Conservative Lending Culture
2% Market Share
Low Capital
To launch N75bn Private Placement
Foreign currency Loan Accounts for 40.5% of the Portfolio
Risky Oil and Gas Lending Accounts for 31.5% of Loan Book
GCR Ratings has affirmed Sterling Bank Limited’s national scale long- and short-term issuer ratings of BBB (NG) and A3 (NG), respectively.
According to a rating note, the rating agency concurrently affirmed Sterling Investment Management SPV Plc’s N32.89 billion Series 2 Fixed Rate Senior Unsecured Bond rating of BBB-(NG), with a stable outlook.
The national scale long- and short-term issuer ratings of Sterling Bank Limited reflect the strengths and weaknesses of the non-operating consolidated group, Sterling Financial Holding Company Plc, GCR said.
The group comprises Sterling and The Alternative Bank, while the latter remains the core operating entity within the group, accounting for 95.7% and 94.5% of total assets and operating revenue, respectively, as of 31 December 2023, the rating note stated.
GCR explained in the note that the rating affirmation reflects Sterling’s good funding structure, sound risk position, modest competitive position, and relatively low capital levels.
The rating agency said its assessment of the bank’s competitive position is slightly positive to the ratings given its relatively modest market share within the Nigerian banking sector.
As of 31 December 2023, Sterling accounted for about 2% and about 3% of the banking sector’s total assets and loans respectively, reflecting the bank’s position as a mid-tier player in the commercial banking space, GCR said.
Sterling offers a range of banking and financial services that cater to retail, commercial, corporate, and institutional clients, with a customer base of about 5 million as of financial year end 31 December 2023.
The bank transitioned to a holding company structure in 2023, in line with banking sector trends. Additionally, the non-interest banking window of the bank became a fully-fledged bank, known as “The Alternative Bank.”
The ratings agency noted that operating revenues have maintained an upward trajectory over the last five years, registering a cumulative average growth rate (CAGR) of 11.2%, supported by the bank’s core earnings (net interest income) which have accounted for 65.8% of operating revenues on average over the same period.
GCR said looking ahead, digital business growth via the bank’s fintech platforms and the addition of subsidiaries under Sterling ecosystem, is expected to diversify earnings and support franchise strength in the medium term.
Sterling’s capitalisation is a major constraint to the ratings due to the low GCR core capital ratio which moderated to 12.2% in 2023 from 13.7% in 2022.
This decline was mainly due to the bloating impact of the Naira devaluation, which led to a faster growth in risk-weighted assets relative to the internal capital generation.
GCR foresees that the bank’s capital position could improve through earnings accretion and the successful equity capital raise of N75 billion via private placement, which is currently awaiting regulatory approval.
This, coupled with other capital raising initiatives, is expected to support the GCR core capital ratio between 13% and 15% over the next 12-18 months, the rating note added.
GCR said the bank’s risk position is a strong driver of the ratings due to its generally conservative lending culture. Nevertheless, Sterling was not immune to recent macroeconomic challenges, which have plagued asset quality across the wider banking sector.
As of 31 December 2023, non-performing loans (NPL) and credit loss ratios, jumped to 5.1% and 1.5% (from 3.9% and 1.2% in 2022) respectively.
Additionally, Sterling’s loan book grew to N895 billion as of 31 December 2023 from N737 billion in 2022, largely driven by the increased foreign currency loans, which accounted for 36.4% of the loan portfolio as of 31 December 2023 and rose further as at Q1 2024 to 40.5%.
Positively, GCR analysts said they have noted the improvements with respect to asset quality as of 30 June 2024, as NPL and credit loss ratio moderated to 4.3% and 0.9% respectively.
However, the rating agency said it is not yet clear if the improvement can be sustained given that macroeconomic challenges have not abated.
GCR said the loan book is somewhat riskier from a concentration perspective as sectorial lending concentration to the oil and gas sector increased to 31.5% as of 31 December 2023 from 21.5% in 2022 following the devaluation of the naira.
Similarly, the bank’s single largest and top twenty obligors accounted for a higher portion of the loan book at 8.0% and 53.2% respectively.
To reflect these changes, GCR analysts said they have made a slightly negative adjustment to the risk position assessment, and further deterioration in asset quality could place downward pressure on the ratings.
Sterling’s funding and liquidity are positive rating factors as the bank is largely funded by customer deposits, which made up 87.8% of the funding base as of 31 December 2023.
The bank’s deposits are dominated by the low-cost current and savings deposits, which accounted for 74.8% of total deposits.
However, the cost of funds increased to 4.0% in 2023 (2022: 3.6%) in line with other banks given the central bank’s policy tightening stance.
Depositor concentration remains low, with the top twenty depositors accounting for 20.3% of total deposits as of 31 December 2023, while the single largest depositor accounted for 7.0%.
Sterling’s liquidity position is well managed, with the regulatory liquidity ratio registering at 32.4% as of 31 December 2023 (2022: 37.2%) above the minimum requirement of 30.0%.
Also, the bank’s liquid assets covered its total wholesale funding and customer deposits by 3.6x and 47.6% respectively in 2023.
“We expect the bank’s funding and liquidity profile to remain at current levels over the next 12-18 months”, GCR said.
Outlook statement
GCR said the stable outlook reflects the rating agency’s expectation that Sterling’s sound asset quality metrics will be maintained despite the macroeconomic strains.
The ratings agency analysts also expect the funding and liquidity to remain at good levels, underpinned by the increased funding through the bank’s deposit mobilisation strategy.
“We expect the GCR core capital ratio to range between 13% and 15% over the rating horizon, balancing the planned capital injection with the anticipated growth in risk assets in the short to medium term,” GCR said. #GCR Affirms Sterling Bank Rating with Stable Outlook Jaiz Bank Value Increases by 11.2% to N86 BillionThe post GCR Affirms Sterling Bank Rating with Stable Outlook appeared first on MarketForces Africa.