DURING the 2003/2004 financial year, Prudent Bank intensified its drive at deepening relationships in the retail end of the banking market by not just expanding territorial frontiers but also adding some innovative products and services to its growing list of consumer products. Since 2000, when the bank transited from largely narrow market of wholesale business, it has enthusiastically embraced rapid growth strategy which saw the number of branches increased from just one in 1999 to thirty-five “installations” as at end of 2004 financial period, with plans to further increase the network to thirty-nine by the end of 2004/2005 financial year. It would be recalled that under the five-year re-engineering project launched in 1999/2000, the bank planned to grow its branch network to 36 by the end of March 2005. It is almost certain that this target would be met.
But the more significant development during the last financial year is that Prudent now plans beyond the brick and mortar expansion of market reach. It launched the initial phase of a retail electronic banking initiative under which Automatic Teller Machines (ATMs) were deployed to several business sites in a move to serve customers beyond regimented duration and hence decongest the banking halls. This service could be seen as the latest addition to other carefully targetted, value-added and innovative products like Prudent Rainbow Savings Account, Junior Education Fund, Prudent Teen Card, Prudent Youth Card, Easy Buy, Shareline, Money Wise Account, Value Card and Prudent e+. These products have proved very successful in growing the bank’s deposit base which stood at N20.91 billion as at 31st March, 2004 from just less than half a billion in 2000. Analysts believe that this success is largely a result of unique market-based approach to product development and the long institutionalised feedback machanism inherent in the customer championship initiative (Champ) launched by the bank a few years ago.
The result is that Prudent Bank consciously tries to leave a trail of satisfied customers in every services delivery opportunity it gets involved in.
Perhaps it is not only customers that get satisfied, shareholders also seem to be delighted with reward they get from their investment in the bank. No wonder, the price of its stock rose successively in the capital market over the last four years by approximately 150 per cent.
EARNINGS AND PROFITABILITY
Our Analysts, since 2001, noted that Prudent Bank had always been a profitable franchise, only that size of business and profits remained very low when it operated in the wholesale market. However, since 2000/2001, when the bank commenced some conscious efforts to grew the business, earning and profit levels also responded positively and now compares favourably with those of competitors both in size and relative terms. For instance, while Gross earning was a paltry N185 million in 2000, it had jumped to N5.25 billion in the 2003/2004 financial year — a figure that comfortably found a place in the top 25 of the industry. It was not in the top 60 prior to 2000. But earnings did not only alter in size, it also changed in structure.
In 1999/2000, while interest income constituted 91 per cent of entire earning, it declined to 69 per cent by 2004 such that fees and commissions assumed greater importance. As interest income proportion declined in 2004, net interest margin increased marginally from 46 per cent in 2003 to 47 per cent in 2004. This is a remarkable achievement in an industry long beset by shrinking margins, and came just as the bank was able to moderate growth in cost of funds. Surely, the bank has left no one in doubt about the increasing success in accessing low cost funds as it leveraged on its new found size. However, notwithstanding the bank’s rein on funding costs, the increased cost of overheads influenced our proxy cost efficiency measure to trend downwards from 20 per cent in 2003 to 17.5 per cent in 2004 just earnings efficiency measure witnessed a similar movement from 26 per cent to 22.4 per cent.
But, aided by strong net interest position and size of earnings, net profit continued its un-interrupted upward trend since 2000 when N41 million was reported. It increased from N576 million in 2003 to N610 million in 2004 which again is within the top 25. This performance is also significant in the light of declining trend of industry profits. However, in line with adverse movements in cost and earning efficiency measures, return in average equity declined further to 23.1 per cent from 26 per cent achieved in 2003 which compares favourably with the industry average and also guarantees positive real returns to shareholders. And because of the impressive performance and need to reward shareholders directly even in the face of consolidation arrangements, the bank decided to pay bonus dividend totaling N305 million to shareholders.
All relevant variables considered, P.A. Data Rating Service assigned average rating (B) to this performance. The bank earned the same rating in 2003.
SAFETY MARGIN AND LEVEL OF CAPITALISATION
One thing Prudent Bank found out early in its retail business life is the imperative for strong capital base required, especially to support the quest for growth. That was why it approached the capital market in 2002 for a capital issue that increased shareholders’ fund from N706 million at the end of 2001 financial year to N2.05 billion at the close of 2002. By the reason of this development, the critical base ratio increased from 20 per cent to 29 per cent and P.A. Data Rating Service upgraded the bank’s safety rating from below average classification to above average (A-). Since then, the bank has relied on retained profits for capital accumulation such that by 31st March 2004, about N2.95 billion had been accumulated as shareholders’ fund.
This translates to approximately 20 per cent Risk Weighted Asset Ratio, same as the preceding year but lower than the 2002 position because of rapidly expanding business size. But this risk coverage ratio amounts to double of the minimum required level of 10 per cent, and implies significant safety margin to continue comfortably on the part of growth. However, the need to satisfy the regulatory requirements for consolidation means that the bank must continue to strengthen its capital base. Accordingly, it recently increased authhorised share capital to N7.5 billion with plans to use combination of rights and prospectus offers to increase paid-up capital to that amount.
Owing largely to growing business which reduced spare capital capacity safety and capitalisation was down-graded marginally from good (B+) to average (B) in 2004.
LIQUIDITY AND ASSET QUALITY RISK CLASS
The most significant but largely unheralded aspect of Prudent Bank’s result in the past few years relates to the efficiency with which it has managed its balance sheet to minimise the risk it faced on credit exposures and risk faced by customers in relating with the bank. Since 2000, the bank took what appears to be conscious steps to reconstruct its portfolio towards risk neutrality and industry average. Infact, it successively reduced estimate of portfolio risk proportion from a high level of 71 per cent in 2000 up to 2003 when 55 per cent (industry average) was attained. It rose marginally to 57 per cent in 2004. This scenario enabled it to maintain liquidity at moderate levels within 50-55 per cent range between 2000 and 2004.
On the quality of risk assets, the bank has succeeded in keeping down the proportion of non-performing loans through application of time tested risk management strategies and adequately trained credit Analysts. Over the past five years, the ratio remained between six per cent and 15.4 per cent. Interestingly, in 2004 the non-performing loan ratio was 15.4 per cent and this compared favourably with industry average of 22 per cent for December 2003. Hence, as the bank tried to grow earnings, on increased business volume, risk quality was not compromised. Indeed, quality increased successively since 2000 in the estimation of Analysts. As for 2004, P.A. Data rating Service assigned the above average rating (A-) to the bank in the performance class. The bank thus retained the preceding year’s performance rating in the area of quality of asset and liability risk.
SUMMARY
For Prudent Bank, 2004 was another successful year as it continued on a new found path of rapid growth. More remarkable was a significantly above average result arising from risk management efficiency. Recently, the bank, in conjunction with four others signed a Memorandum of Understanding to lead the way in the formation of Sterling Group. With the strength it demonstrated once again in 2004, Analysts believe that Prudent Bank would be going into the arrangement with a lot of values.
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