May 11, 2020

Polaris Bank: Profitable foundation for retail dominance

Polaris Bank introduces Target Savings Account

Polaris Bank

By Babajide Komolafe


Polaris Bank

When Polaris Bank was created in September 2018 to inherit the assets and liabilities of the defunct Skye Bank Plc, the banking industry did not expect much in terms of performance from the management of the ‘Bridge Bank’.

The most optimistic view then was that the CBN appointed management, led by Tokunbo Abiru would stabilize the bank and prepare it for eventual acquisition by new owners.

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This expectation was understandably driven by the deteriorating conditions of the defunct Skye Bank, occasioned by years of poor corporate governance which triggered rise in non-performing loans (NPLs) to almost 80 percent, while other prudential and adequacy ratios fell far below regulatory thresholds and hence the eventual intervention of the CBN on July 4th 2016.

Polaris Bank has however defied these challenges and skepticism by posting a very profitable financial performance at the end of its first full year of operations which ended December 31st 2019.

According to the audited financial results of the bank for the period the bank recorded Profit Before Tax (PBT) of N27.342 billion.

Also, despite the pay-down of outstanding legacy obligations of over $200 million (about N77 billion) within the period, the bank achieved customers’ deposit of N857 billion and total assets in excess of N1.4 trillion.

The above indices, in addition to capital of N82.9 billion, which is well above the regulatory minimum of N25 billion confirms that Polaris Bank remains a systemically important bank within the Nigerian financial system.

Corporate Transformation Plan

But this odd defying performance of Polaris Bank did not happen by chance. It was the product of a carefully crafted Corporate Transformation Plan implemented of the Tokunbo Abiru led management.

Driven by the focus to build the foundations of a bank for the future, as well as the conviction that the future of banking globally and in Nigeria would be shaped by technology, with banks significantly dependent on technology for mobilising savings, extending and administering loans, payments analytics and management decision making, the Tokunbo Abiru led management commenced the implementation of a strategically crafted Corporate Transformation Plan to position the bank for retail banking dominance through digital technology.

This led to the adoption of a predominantly retail market focus in line with the strengths and competencies of the bank. The transformation plan also defined new customer value propositions of Ease, Friendliness and Accessibility, with focus on: Convenience, customer excellence and customer delight; Creation of opportunities and provision of empowerment for selected sectors: Youths, SMEs, Women and the Underserved; Digital First aimed at providing easy and simple banking through digital and being future focused.

The objectives of the Corporate Transformation Plan included sustainability; profitability and capital preservation; regulatory compliance and buy-in; realizing value from investments; aligning business and operating models to strategic aspirations; and execution-achieving quick-wins, and phased implementation.

Thus in line with the critical pillars of the transformation plan, namely, Digital Transformation, Enhancement of Information Technology (IT) Infrastructure and Technology Platforms, Cost Optimisation and Operational Efficiency, Workforce and Culture Alignment, Brand Equity Enhancement and Business/Strategic Initiatives, the management of Polaris Bank in 2019 focused on refreshing and upgrading the bank’s IT infrastructure, which led to huge investment in the bank’s critical IT infrastructure including data centres, digital labs and human capital.

Shift to low-cost deposits

This strategic effort to focus on the retail segment of the market through digital technology and agency banking led to a marked shift in the structure of the bank’s deposit base, away from the volatile and high cost ‘term deposits’ to the stable and low cost ‘savings deposits’.

Thus, while ‘term deposits’ dropped by 3.1 percent to N294.4 billion at the end of December 2019, from N303.9 billion at the end of December 2018, ‘savings deposits’ rose by 8.4 percent to N167.7 billion from N154.5 billion in the same period.

As a result, the share of ‘savings deposits’ in total deposit rose to 19.6 percent at the end of 2019 from 18 percent at the end of 2018, while the share of ‘term deposits’ to total deposit dropped to 31 percent from 32 percent during the same period.

As result of this strategic shift the bank was able to record net interest income of N87.7 billion in its first full financial year.

Strong Performance Ratios

The positive impact of the Corporate Transformation Plan is also reflected in the strong and competitive performance and efficiency ratios achieved by Polaris Bank.

The bank achieved a Capital Adequacy Ratio of 14 percent indicating sufficient capital buffers to customers and other counterparties. Polaris Bank also recorded Return on Assets (ROA) of 2.0 percent, Return on Equity (ROE) is 33 percent, Return on Sales (ROS) is 18 percent, and Liquidity Ratio at 81 percent. These ratios, which compares favourably with the 2019 financial results of leading Tier-1 banks and other banks, demonstrate operating efficiency, strong inherent capacity for profitability and returns to stakeholders, very comfortable liquidity and asset efficiency.

The bank also recorded Cost to Income ratio of 59 percent which is well in line with industry averages and further reinforces the institution’s underlying reality of operational and cost efficiencies, which is a significant achievement in view of its legacy constraints.

Improving NPL ratio

Besides the strong performance ratios, the management of the banks also made appreciable progress in its efforts to clean up its loan book, and thus free the bank from the legacy challenge of Non Performing Loans.

Thus the bank’s NPL ratio improved to 46 percent from about 80 percent inherited from the defunct Skye Bank. While the NPL ratio is still intolerably high, the Tokunbo Abiru management has demonstrated strong commitment to ensuring continued efforts in this regard until NPLs are within acceptable benchmarks. And given their success over the last three years in loan recovery, collateral documentation and cleaning up the portfolio, they appear to be on course to a successful portfolio repositioning and thus complete the mission to lay a profitable foundation for a digitally driven retail focused bank.