Skye Bank losing profit on rising credit losses, falling earnings

Skye Bank achieved a reasonable growth in profit last year without improving revenue. That isn’t likely to be repeated this year. Revenue weakness is persisting for the bank and gross income isn’t expected to be reasonably better than what it earned in 2012. Cost moderation shielded profit from the revenue weakness last year. This year, loan loss provisioning has doubled and eroded profit margin, leaving high prospects for profit to drop to a three-year low.

The outlook however seems to obscure significant progress that management has made on cost control.  Mr. Timothy Oguntayo, group managing director/chief executive officer of the bank, has succeeded in putting key operating costs in check. Only the loan loss expense appears to remain out of his control for now. The problem is that the surge in provisioning is reinforced by disappointments in all the key revenue lines of the bank.

Second quarter operations ended with gross earnings of N63.88 billion, which is a drop of 10.2% from the corresponding figure last year. Both interest and fee-based earnings went down during the period with investment and other operating income leading the drop at 13.8% to N12.62 billion. Its investment portfolio has declined by 11.7% to N198.12 billion from the closing figure last year.

Based on the growth rate in the second quarter, gross income is projected at N128.5 billion for Skye Bank at the end of 2014. That will be a flat growth over the full year revenue figure of N127.34 billion the bank posted in 2013. This indicates that the bank isn’t likely to improve revenue for the second year running from the N127.73 billion it reported in 2012.

The bank earned an after tax profit of N5.18 billion at the end of the second quarter, which is a drop of 31.1% from the corresponding figure in 2013. Based on the current growth rate, the bank is expected to close the current year with an after tax profit of N11.9 billion, the lowest in three years. This will be a drop of 25.7% from the peak profit of N16.02 billion the bank reported in 2013. Such a significant drop in profit is not expected from any other listed bank this year.

Despite a general slowdown in earnings growth in the banking sector this year, banks are not expected to suffer profit declines. A drop in profit will break the profit recovery/growth move that Skye Bank has made in the past two years. The bank’s profit had dropped by nearly one-half in 2011 while a strong recovery followed in 2012.

Profit weakness is driven by the doubling of loan loss expense at N5.01 billion during the review period. It claimed 7.8% of gross earnings at the end of June against 3.5% in the second quarter of last year. Other main expense lines are virtually under control. Interest cost dropped ahead of interest income by almost 24% to N20.73 billion, leading to an improvement of 4.3% in net interest income. This is against a flat growth in deposit liabilities, indicating the lowering of average cost of funds for the bank this year.

Operating cost was flat at N30.88 billion at the end of the second quarter, which is a feat accomplished in a rising cost environment. Against the drop in gross earnings however, operating cost margin has increased from 43.4% last year to 48.3% at the end of the second quarter.

The result of the cost-revenue relationship of the bank this year is a loss of profit margin in the second quarter. Net profit margin has declined from 11.8% in the corresponding period last year and from 12.6% in December to 9.1% at the end of June, one of the lowest in the banking sector this year.

The bank earned 44 kobo per share at the end of the second quarter, down from 64 kobo in the same period last year. Earnings per share is projected at 90 kobo for Skye Bank at full year. This will be a drop from N1.21 at the end of 2013 from which the bank gave shareholders a dividend of 30 kobo per share.

The bank’s operating difficulties centre on the inability to grow revenue. Despite some cost control success, it is devoting increased proportions of gross earnings to key expense lines in view of the revenue growth constraint. With costs largely under check, Oguntayo needs to step up revenue growth in order to raise his bank’s comparatively low profit margin and improve profit outlook for the year.

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