Two major cost increases eroded the margins and cut down the profit improvement of Sterling Financial Holdings Plc to N21.5 billion in 2023, an 11.5 per cent cut from about 29 percent in the preceding year.
At the end of the year, it was one of the slowest profit improvements for the group in seven years.
The bank’s unaudited full-year financial report at the end of December 2023 shows that interest expenses and operating costs constrained management’s ability to convert gains in revenue into profit. Interest expenses led the cost increases with a jump of 40 percent in the year to almost N73 billion – the most rapid growth in cost of funds for the bank in 20 years.
The high growth in interest expenses is well ahead of an increase of 27 percent in interest earnings, which amounted to N163 billion at the end of the year. Impacted by the incursion of cost of funds, net interest income grew by 18 percent to over N90 billion at the end of the year.
Operating expenses also grew well ahead of earnings in the year at an increase of over 25 percent to more than N109 billion – the most rapid increase the bank has recorded in six years. Operating expenses claimed an increased share of net income, making a difference between an increase of 23 percent in net operating income and a slower growth of 13.5 percent in pre-tax profit to N23.6 billion for the full year.
The final quarter recorded the worst period of the cost-income imbalance the bank faced in 2023. At N23.4 billion for the quarter, the cost of funds grew by 40.5 percent against an increase of 17.4 percent in interest income for the quarter to N45 billion.
Interest expenses therefore claimed more than all the increase in interest earnings in the final quarter, leading to a slight decrease in net interest income for the quarter at N21.8 billion. Improvements in all the non-interest income lines of the bank in the final quarter enabled an increase of 19.5 percent in operating income to over N39 billion for the period.
Some strength was added by a decline in credit impairment charges in the fourth quarter from N3 billion to N2.5 billion, which helped to step up net operating income to an increase of 23.3 percent to N36.8 billion for the quarter. However, operating costs grew by 33.6 percent to over N31 billion in the final quarter and claimed more than all the increase in net operating income.
Consequently, pre-tax profit for the closing quarter dropped by about 14 percent to N5.5 billion while the quarter ended with a bottom line of less than N4.8 billion – down from nearly N6 billion in the same quarter in 2022.
Credit loss expenses afforded the bank the only major cost-saving line with a decline from a little over N9 billion to less than N9 billion over the review period. This helped to dilute a bit the pressure from the cost of funds and enabled the increase recorded in net operating income for the year.
Sterling Financial Holdings closed the 2023 operations with gross earnings of N214.6 billion, which is an increase of N45.5 billion or 26.9 percent from the preceding year’s figure of N169 billion. Revenue growth in the year is much elevated from an increase of 14.2 percent in 2022 and stands as the strongest revenue improvement for the financial group since 2013.
However, the increases in interest and operating expenses hindered the bank’s ability to convert the revenue gains into profit. Of the increase of N45.5 billion in gross earnings, only N2.2 billion was added to the bottom line. The bank’s operating cost margin remained quite high at 50.9 percent for the year – against the average industry estimate of below 40 percent.
Net profit margin went down from 11.4 percent in 2022 to 10 percent at the end of 2023 – one of the lowest profit margins in the banking industry.
The bank earned 75 kobo per share for the 2023 operations, improving from 67 kobo per share in the preceding year.
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