The Many Headaches Of Keystone Bank – Underlying Pressures Persist


Friday, March 31, 2019 – Originally written on December 28, 2018   07:38PM / By TSB/ Proshare Research / Proshare Content



  • Profit After Tax (PAT) of N5.3bn, N79.2bn and loss of N1.3bn recorded in March, June & September 2018, respectively.
  • From the N5.3bn PAT declared in March 2018, the previous two months losses were subsumed under the profit, while there was quarterly bonus taking by directors.
  • Capital Expenditure growth was above the bank’s net working capital, substantial increase was noticeable in fixed assets, mostly vehicles.
  • Excessive growth in administrative and general expenses depressed the banks operating income and increased the erosion of equity by way of accumulated losses.
  • Steady increase in the bank’s non-performing loans. 



Pried from the grips of bank undertaker, the Asset Management Company of Nigeria (AMCON), Keystone Bank, a successor institution to defunct Bank PHB, is coming to terms with the cold realities of a difficult economic environment.


A cursory review of the bank’s recent Q3 2018 financial statement showed the following:


1.       Operating expenses grew from N2.04bn at the end of March 2018 to N2.4 billion at the end of June 2018, and then rose further by N400million at the end of the September 2018; representing a leap of 17.64%. On a year to date basis, it grew consistently from N6.3bn in Q1, 2018 to N13.7bn in Q2 2018 and N22.4bn in Q3 2018. This may be attributed to the ill-advised expansion in its capital and administrative expenses which appears to be the result of the banks new owners and management taking early bonuses unjustified by immediate corporate performance.


2.      Non-financial costs spiraled out of control rising by 17.4% between March and June 2018 and then by 18.8% between June and September 2018. This contrasts sharply with falling operating income which declined by 66% between March and June 2018 while income dropped from N7.35billion at the end of March 2018 to N2.50billion at the end of June 2018; after which operating income declined by 38% from N2.50bn in June 2018 to N1.55 billion in September 2018.


Fig. 1: Net Interest Income (Year-to-Date)

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Source: Bank Financial Returns (00082)


3.      On a year-to-date basis the bank’s operating income rose from N10 billion in March to N19.6 billion in June (a growth of 96%) and N25.8 billion in September (a quarter-on-quarter growth of 32%); while loans that represent the core business of the bank’s activities grew by a mere 6% between March and June and only 12% between June and September 2018.



Fig 2: Operating Income for March - September 2018

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Source: Bank Financial Returns (00082)


Fig. 3: Operating Cost for March - September 2018

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Source: Bank Financial Returns (00082)


Some Bright Spots

The bank’s nine-month 2018 results showed a notable rise in net interest income. Keystone Bank’s net interest earnings grew by a few strong paces from N7.5bn in March to N15.5bn in June and then N18.3bn by September 2018. This could be interpreted to mean that the bank has been able to achieve a fair amount of success in growing operating incomes. While interest incomes have moved upwards over the last nine months, interest expenses have grown equally. However, the spread between income and expense has left the bank with a still respectable net position on a year to date basis.


The bank’s deposit growth was equally notable. Total deposits grew by 10% between March and June 2018 but slowed down to 6% between June and September a sign that the bank may need to embark on aggressive marketing as it already has a relatively weak market share position, and if it does not grow deposits more strongly it could face both a liquidity and profitability challenges in the quarters ahead. It should be noted, however, that the bank’s demand deposits rose by N20bn or 33.9% from N59bn in September 2017 to N79bn in September 2018. This kind of growth, if sustained, could help Keystone’s management reduce the bank’s average cost of deposits year-on-year and improve its bottom line.


The bank has also pushed up loans and advances, growing it from N174.8bn in March 2018 to N186.5bn in June and N 209.8bn in September or what amounts to a 3.1% growth on a compound monthly basis. This has helped to increase revenue but has not done much to quench the impact of rising operating cost on the banks bottom line. The bank’s profit before tax (PBT) has fizzled like a spent Christmas rocket dropping from a profit of N3.7bn in March 2018 to N5.9bn in June and down again to N3.5bn in September.



Steam Rolled Profit and Loss Position

On a quarterly last month basis, the scenario is less flattering, the banks profit before tax rose to a whopping N5.3bn in March 2018 and then crashed to N95.6mln in June 2018 before crumbling to a loss of N1.3bn in September 2018. ‘We suspected that the banks books were under pressure, but nobody saw this coming’’ says a managing director of a stock broking house on Lagos Island.


According to the chief executive who preferred to retain anonymity, ‘’the banking sector generally has had a rough year in 2018, but Keystone Bank has experienced a storm during a rain shower. Whilst most banks have seen their bottom lines compressed a bit, Keystone bank’s P&L (profit and loss) looks like it has been steam rolled’’.


A lot of the trouble comes from the banks high capital expenditure which has hurt its operating cash flow and thinned down what analysts have called its ‘’free’’ cash flow. The banks huge expenditure on motor vehicles in 2018 at a time when a multiplicity of electronic banking platforms has conveniently reduced the face time needed to service corporate and private customers is difficult to understand. This huge budget item has raised depreciation charges and increased operating cash flow but equally reduced the cash flow needed for meeting dividend payouts or additional future investments in income generating assets or loans.  The banks expenditure on cars for the year 2018 is about three fifths or 60% of the lenders net capital expenses over the period.


The bank also gets into some difficulty where its current liabilities exceed its current assets to deliver negative working capital. Governance and risk management standards require that capital expenditures should be constrained by the extent of the positive size of a bank’s capital. This is designed to ensure that the bank applies good habits to its operations by guaranteeing that it has adequate liquidity to meet customers’ cash demands. For example, in March 2018, Keystone Bank had a financial assets base of N258.9 billion but a current liability of N298.5 billion, in June financials assets went up to N286.2 billion but liabilities also soared to N331.2billion, by September financial assets had risen to N316.7 billion but liabilities went up a further 8% to N357.1 billion. In these circumstances, prudence required that the bank cut bank on its capital spending.


Besides, administrative costs seem to have recently become a matter of concern. The banks administrative expenses rose from N466.6 million year-to-date in March 2018 to N1.1 billion in June and then settled at N1.6 billion in September. This represents an average nine-month compound monthly surge in general administrative expense of 15.4%, perhaps one of the heaviest in the sector in the course of the year. In the month of March 2018 general administrative expenses for Keystone Bank was N125 million and went up to N214.9 million in June (representing a forward jump of 72%), before dropping to a slightly calmer N199.6 million in September.


Fig. 4: Cost-to-Income ratio (Year-to-Date 2018)

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Source: Bank Financial Returns (00082)


While capital expenditure on motor vehicles has been a red letter item on the bank’s books it has combined with the bank’s rising administrative costs to have an adverse effect on the corporate bottom line and worsened keystone Bank’s cost-to-income ratios which currently stands at 87% on a year-to-date basis for September 2018 but looks far worse on a quarterly month-ended September 2018 basis, where it stood at a staggering 185%. The large disparity in ratios for the year-to-date numbers and the quarterly month-end figures raise not just a few eyebrows about the likelihood of creative accounting to support fresh earning numbers on a year-to-date basis.


Fig. 5: Income Statement As at September 2018

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Source: Bank Financial Returns (00082)


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Any Way Out?

If Keystone Bank is to wriggle away from its current operating problems, the bank’s management will need to place a firm fist over growing corporate expenses, particularly the bank’s growing fixed assets and its escalating administrative costs. An increasing number of bank executives have become mindful of the fact that banking has become commoditized, meaning that there is little, if any, distinction between services and products of different banks.


To figure out a sustained corporate survival strategy, banks such as Keystone need to learn to lean into lower service costs while equally leveraging higher quality of staffers. Indeed, staff recruitment must increasingly emphasis problem-solving and creative thinking skills, because with a younger national demography easing into higher income brackets, survival of any bank going forward would require service-delivery speed, ease of digital user interface, higher problem-solving capabilities and shorter process turnaround time. 


Fig. 6: Keystone Bank’s Emerging Business Ecosystem

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Keystone Bank’s high-cost, low market-share model is not sustainable and could see the bank being acquired by a larger and more efficient financial institution in the not-too-distant future. With the possible merger between Diamond Bank and Access Bank still being worked out, Keystone bank needs to look over its shoulder.   In Nigeria’s emerging banking market, being a small, inefficient, high cost lender in an ocean with a few large but efficient, low cost competitors is like feeding killer sharks a tasty afternoon snack with little or no effort.


According to Tony Madojemu, a former Diamond Bank staffer and more recently financial consultant and director of Heritage Bank, ‘’keystone’s high cost to income ratio mirrors that of several other second-tier banks, the small retail deposit base and relatively low gross earnings is taking a bite out of operating income’’. He pointed out that the best route for several tier II banks is a consolidation process that eases the pressure of having to meet a higher IFRS 9 reporting standard and a bigger capital adequacy headache. ‘’Going into 2019 we could see a few more consolidation efforts gain momentum’’, he insists.



Fig. 7: Strength-Market Attractiveness Matrix 


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Source: Proshare Content


Deductions and Conclusions

Keystone Bank’s problems relate to a number of quantitative and qualitative challenges:

  1. The Management and Board have been unmindful of escalating expenses.
  2. Alleged political maneuvering in the acquisition of the bank has played a devastating role in undermining the board’s credibility.
  3. Creative accounting has exaggerated performance and may lead to insolvency in future if left unaddressed.


For the bank to pull back from the brink of illiquidity, it must reduce capital expenditure, build up a reliable deposit base quickly and reduce political interference.




For further details and information, kindly contact the Managing Editor, Teslim Shitta-Bey via or call 0806 081 5334 or 0700 PROSHARE.



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