Wema Bank falls below investment grade — Fitch

The H1 2015 financial result of the bank released earlier this week showed that its net interest income also declined from N1.70 billion in H1 2014 to N1.17 billion as its profit before tax also took a backward movement from N1.70 billion in H1 2014 to N1.17 billion.

Analysts opined that this trend may continue through the 2015 financial as the President Muhammadu Buhari administration would most likely pursue a tight fiscal policy.

They believed this falling in earnings would not be peculiar to Wema Bank; it would cut across the entire banking sector.

The Managing Director, Wema Bank, Mr. Segun Oloketuyi, attributed the seemingly poor performance of the bank in the H1 of 2015 to tough operating environment, listing economic headwinds, regulatory restrictions and political uncertainty as factors it had to contend with.

“The first quarter of the year was characterized by election-related activities and political manoeuvrings with limited emphasis on economic matters, while the second quarter was largely characterized by the continued pressure on the currency, the tight monetary policy conditions and the low level supply of petroleum products.

All these issues affected consumer discretionary spending and indeed the growth in our Retail volumes.

Due to the lack of economic policy clarity so far in 2015, investment decisions have been tentative. In addition, the CRR harmonization has reduced liquidity with significant impact on  margins from money market investments. We are confident that as the new administration settles into office, its policy thrust will become clearer, hence, enabling us to continue to make well informed lending decisions mitigate risk exposures and further expand our customer base,” he explained.

Fitch explained that Wema’s IDRs and VR reflect the bank’s intrinsic characteristics, including the bank’s improving performance, although earnings capacity is still limited.

“The bank is still recovering from large historical losses, resulting in its recapitalisation in 2013.

The bank has since returned to profitability, but internal capital generation remains weak, providing limited capital buffers with which to absorb losses,” it stated.

The ratings agency said it considered the bank’s modest Fitch Core Capital (FCC) ratio relative to peers, which provides limited buffers against moderate internal or external shocks, particularly given the increasingly challenging economic conditions and market volatility in Nigeria.

Fitch added, “The FCC ratio improved significantly under Basel II due to the use of credit risk mitigation to reduce risk-weighted assets.

“Wema was recapitalised by NGN40bn in 2013 in order to meet regulatory requirements. The bank plans to raise tier 2 qualifying junior debt to fund growth and strengthen regulatory capital ratios.

However, this will not benefit its FCC ratio and lending growth is likely to put pressure on core capital ratios.”

For the Chief Finance Officer of the bank, Mr. Tunde Mabawonku, “Operationally, the Bank has continued to efficiently deploy its assets.

Our loans to deposits ratio has moderated to 57.1%, compared to 57.6% as at December 2014, through a cautious approach to our lending, pending policy clarity from the new administration.

 The liquidity squeeze and tight monetary policy conditions affected our yields from money market investments.

Technically, banks can only lend 39% of available resources, as CRR is 31% and liquidity remains 30%.

We therefore used the first few months of the financial year to streamline our mix of deposits and funding sources.

This has resulted in slightly smaller deposit liabilities volumes but a better cost of funds.”

He projected that there would be an improved economic activity and systemic liquidity once the “bail-out” talks are concluded in the H2 of this year.

Mr. Mabawonku hoped that there is more clarity on the economic policy of the new administration, which would fast track economic activities in the country.

“Our expectation is that economic activities will pick up from August/September this year and the momentum will be sustained throughout the remaining months of the year.

“While general economic conditions and the regulatory environment remain tight, we believe that our lending strategies, embedded risk management culture and continuous cost savings will enable us stand firm throughout this period.

We remain on track to deliver the 2015 financial projections,” he stated optimistically.