Skye Bank could not improve its gross earnings in 2013 but it raised profit reasonably in the year through cost saving in three major expense lines. These are interest expenses, loan loss expense and taxation. Revenue declined slightly from the 2012 peak but profit improved for the second year after a major turnaround in the preceding year. Profit margin has improved but remains well below the best industry numbers.
At N127.34 billion, gross earnings slipped by 0.3% in 2013 against an increase of about 22% in 2012. This is a set back on the bank’s recovery process after a drop in gross earnings in 2010. Gross income has therefore remained below the 2009 peak of N131.5 billion. The actual revenue in 2013 is 7.2% below our full year forecast of N137.2 billion for Skye Bank.
Fee-based income accounted mainly for the inability to grow gross earnings in the year. Investment and other operating income dropped by 17.5% to N22.03 billion in the year while interest income improved by 4.2% to N105.31 billion. This was insufficient to counter the drop in non-interest income.
Despite the revenue weakness, the bank grew after tax profit by 26.7% to attain a new peak of N16.02 billion. The bank therefore sustained the recovery trend in profit for the second year after it achieved a big turnaround in 2012. The actual profit figure is almost at par with our forecast net profit figure of N15.8 billion for the bank in 2013.
Skye Bank improved its ability to convert revenue into profit in 2013. Net profit margin improved from 9.9% in 2012 to 12.6% in 2013, still one of the lowest profit margins in the banking sector. It is however one of the few banks that were able to improve profit margin last year when a decline in profit margin was a general industry trend.
The ability to achieve a reasonable gain in profit margin in a flat revenue situation reflects major cost saving during the review period. The bank saved costs in three main expense lines in the year – interest expenses, provision for credit losses and taxation. Interest expenses dropped by 22.8% to N43.62 billion against the moderate improvement of 4.2% in interest income. This more than compensated for the inability to improve revenue by lifting net interest income by 38.6% to N61.70 billion.
Interest expenses therefore claimed a significantly reduced share of both gross earnings and interest income at 34.3% and 41.4% compared with 44.3% and 56.0% in the preceding year respectively. The drop in interest cost against an increase of 4.2% in deposit liabilities indicates a major reduction in the bank’s average cost of funds.
The second favourable cost behaviour during the year is a decline of 3.4% in loan loss expense at N12.68 billion. The decline is against a marginal increase of 1.8% in loans and advances at about N550 billion. This is an indication that the overall credit quality standard has not changed reasonable during the review period.
A drop of 64.3% in tax expense in the year made the big difference in the bottom line. It accounts for the ability to grow after tax profit by 26.7% from only 3.8% improvement in pre-tax profit. This means the other cost savings could not flow down to the bottom line and only the tax saving accounted for the gain in profit margin the bank recorded last year.
One major cost item stood in the way of converting the cost savings from interest expenses and loan loss provisioning into profit. This is operating cost, which rose by 29.7% to N53.91 billion in 2013. Operating cost therefore claimed a bigger proportion of gross earnings in 2013 than in the preceding year. Operating cost margin increased from 32.5% in 2012 to 42.3% in 2013, still at about the average industry figure.
The bank earned N1.21 per share in 2013, improving from 95 kobo per share in the preceding year. Net assets per share has also improved from N8.09 to N9.11 during the same period. The bank has proposed a cash dividend of 30 kobo per share against 50 kobo per share it paid in the preceding year. The closure date for the company register and payment date are yet to be announced.
