Skye Bank PLC
Business Case Analysis
Skye Bank Plc gross earnings rose significantly at 19.26% in the H1 2013 from the corresponding year. Gross earnings grew to N71.2 billion against N59.7 billion in the equivalent period in 2012, leaving N11.5 billion as extra earnings attracted from the corresponding period to H1 2013.
The growth in gross earnings in the first half of the year was led by non-interest revenue, which leaped by 30.19% to N13.8 billion year-on-year. Interest income grew substantially at 18.05% in the period to N56.523 billion.
Surprisingly, in spite of the fact that banking industry witnessed general rise in interest expenses in the period under consideration, Skye bank interest expenses rose moderately below income growth at 10.05% to N27.236 billion. There you can see that the interest expenses to income proportion dropped to 48% in the H1 2013 against 52% achieved in the corresponding year 2012.
However, gross earnings percentage mix has been stable year-on-year, the group interest income contributed 21% to the overall gross earnings in H1 2012 and 79% came from non-interest income.
But in H1 2013, interest income provided 20% while non-interest income contributed 80% to the gross earnings. Linking this to the loan portfolio of the bank, it means Skye bank Plc concentration is weak toward its lending business in the period.
Year to date, the loan assets of the bank grew at 5.68% at the time economy at large needs more investment in the real sector to upshot growth, rather than focusing on oil revenue. Besides, the loan growth did not commensurate with growth in GDP which is above 6% confirming the above weak lending practice.
Though the bank target loan growth for 2013 was pegged at 10%- a kind of conservative target, of which about 6% has been achieved in the H1 2013. But for comparison; the loan target with peers would have provided a better benchmark for Skye Bank Plc. Looking deep into the figures, the report revealed that growth achieved in loans is equivalent to extra loan disbursed; both at +6% in the last 12 months of operation.
By Q3, Skye banks Skye bank’s interest income was up 14% y/y and 3% q/q. Due to a significant decline in interest expense however, which was down 12% y/y and 32% q/q, the bank’s net interest income grew 42% y/y and 29% q/q. We view the q/q increase in interest income positively considering expected strain on interest income after the implementation of the 50% CRR on public sector deposits and a 4% decline in loans and advances in Q3.
We also view the 32% q/q decline in interest expense (which was achieved on the back of only a 9% decline in deposits) positively as it implies the bank is getting rid of expensive deposits.
Operating expenses increased 38% y/y and 2% q/q. The 2% q/q increase in opex combined with a weaker operating income in Q3 compared to Q2 led to deterioration in the cost to income ratio (ex-provisions) to 73% in Q3 from 66% in Q3. The bank’s opex is running ahead of our FY estimate.
In the Q3, the bank reported impairment charge of N4.6bn (US$28.8m), significantly higher than the N2.9bn in the same period last year, but on a Fy basis, the bank reported a relatively lower impairment charge and other provisions for other liabilities and charges of N12.67 billion as against the N13.1 billion of the previous year .
Also PBT declined 12% y/y and 32% q/q. By Q3 2013, but on a fY basis, the bank was able to make an increased PBT of N15.865bn FY2013 as against the 12.697 bn of FY2012, largely due to a reduction in impairment charges and provisions.
Net fees and commissions also decreased from N22.595bn on a Fy basis in 2013 to N17.204bn in 2012.The decline in net fees and commisions for skye bank is alarming and may be due to the fact that the fees and commisions charged on customers are exhorbitant and unfavourable for business.
Recommendations for Skye bank in treating these arising issues discussed above include:
IT Upgrade and Transformation
- Upgrade of the Bank‟s software, „Flexcube,‟ from version 6.2 to version 12.0, which will be completed in Q2 2014
- Automation of operational processes to support Information and Communication Technology (ICT) Transformation Project
- Ensure that the maturities of the assets on which interest is earned and the maturities of the liabilities on which interest is paid are matched.
- Opt for Long term rates on both interest income and interest expenses, as long-term rates tend to be higher than those predicted by expected future short-term rates. This phenomenon is referred to as liquidity preference theory
- Avoid Arbitrary Cuts
- Industrialize Operations
Growth & Value Chain Based Solutions
- Actively seeking and granting of loans to perceived performing loan borrowers
- Negotiate the C.O.T (Cost of Transfer) with high net worth businesses that perform multiple transactions so that they do not move their monies to other banks.
- Customers would be encouraged to patronize the bank more in the opening / establishment of letters of credit and Forex if the service time is reduced and remittances are done more accurately and reliably.
STATEMENT OF THE PROBLEM
Skye bank Plc in her vision statement seeks to be a leading and first class commercial bank. Incidentally, with a rise in GDP, the Nigerian economy is witnessing an era of increased investments in the real sector. This is good news for the banking industry, as most of the investment deals are financed through the banks, thereby leading to a rise in interest income, as well as net fees and commissions. Hence the opportunities arising should allow Skye Bank prove her ability to lead and be a first class banking institution by extending loans and lines of credit to worthy investments projects in the country so that they can also benefit from them.
Unfortunately, from the analysis of their quarterly and full year financial statements, that does not seem to be the case. Their interest income is a meager amount of their gross earnings and it was highly unstable through out the year. Their net fees and commissions were also on a decline. Though their interest expenses rose moderately below income growth at a period of prevailing rise in the banking industry’s interest expenses, the operating expenses incurred by them were abnormal as there was an increase of 29.69% on FY basis.
Our study in response to the problem, proposes to analyse several options for increasing interest income, net fees and commissions and also reduction of operating costs. We will also consider less expensive ways to mitigate some or all of the problems mentioned above.