09 July 2021 – GCR Ratings (GCR) has affirmed Sterling Bank Plc’s national scale long-term and short-term issuer ratings of BBB_(NG) and A3_(NG) respectively; with the Outlook revised to Stable from Negative.

The stable outlook reflects GCR’s opinion that Sterling Bank will maintain a good financial profile amidst the challenging operating environment. We expect the bank’s asset quality metrics (NPL and credit losses) to be maintained at current levels.

Also, the anticipated growth in risk-weighted assets is expected to be balanced by strong internal capital generation, mitigating downward pressure on the bank’s capitalisation over the rating horizon.

Ratings history – Sterling Bank Plc

Rating rationale

The ratings assigned to Sterling Bank Plc reflects its good business profile, sound risk position, stable funding and liquidity, albeit counterbalanced by the relatively moderate capitalisation and high loan book concentrations.

Sterling’s competitive position is supported by its strong track record, having maintained a positive earnings trajectory over the review period (FY16-FY20). The bank operates a national banking license and delivers banking services to a broad client base comprising retail, corporate, and institutional customers through a network of 157 branches and digital channels.

Sterling is a mid-sized bank and categorised as a tier-2 bank in the Nigerian banking industry, with a modest market share of 3.4% and 2.6% measured by customer deposits and total assets respectively as at FY20. Management & Governance is a neutral rating factor.

Capitalisation is negative to the ratings. Although the bank has a capital adequacy ratio (CAR) above the 10% regulatory threshold (18.0% in FY20 vs. 14.7% in FY19), GCR computed capital ratio registered within the low band at 14.9% in FY20 (FY19: 13.9%) and is forecast to remain within the 13%-14% range over the rating horizon, barring any injection of additional tier 1 capital or significant improvement in an internal capital generation.

Sterling’s risk position is positive to the ratings. This is underpinned by the bank’s low non-performing loan (NPL) ratio of 1.9% as at FY20 (FY19: 2.2%), significantly below the regulatory tolerable limit of 5%, and broadly compares favourably with the industry average of c.6% at FY20.

Similarly, credit losses registered at 1.3% at FY20 (FY19: 0.9%), relative to the industry average of about 3% at FY20. Over the next 12-18 months, GCR expects the bank’s NPL ratio and credit losses to remain within a similar range. FCY loans, at 23.7% of the loan portfolio in FY20 (FY19: 22.9%), also ranks favourably to the industry average of 35%.

Conversely, the bank evidenced loan book concentration, with the twenty largest obligors accounting for 58.3% of the loan portfolio as at FY20. GCR also takes cognisance of the fact that the single largest obligor constituted 24% of shareholders’ funds at FY20, breaching the regulatory threshold of 20%, but balanced against management’s assurance of ongoing efforts at normalising the ratio.

Positively, market-sensitive income (trading gains) constituted a relatively moderate 13.4% of total operating revenues as of FY20 (FY19: 6.0%), underscoring the bank’s minimal exposure to market risk.

Funding and liquidity is assessed at the intermediate level, reflecting satisfactory liquid asset coverage of the funding base. The funding structure is broadly comparable with peers, as customer deposits comprised 84.4% of the funding base as of FY20 (FY19: 87.7%).

The deposit book is relatively diversified, with the single and top twenty largest depositors contributing 5.1% and 19.3% to total deposits respectively as of FY20. As of 31 December 2020, the GCR liquid asset coverage of total wholesale funding and customer deposits stood at 2.8x and 35% respectively, reflecting the bank’s moderately positive liquidity level.