Ademola Adebise, MD, Wema Bank

From a time in its recent past when WEMA Bank literally limped across the stage, the numbers today indicate a resilient fighter that is pushing against all odds to post valued returns to its subscribers. JULIUS ALAGBE reports:

Without any doubt, Wema Bank Plc’s fundamentals gained strong traction in 2018. Across key metrics, there was a significant improvement, particularly when compared with base years. For example, the bank’s earnings per share rose by 48.28% as it moved from N5.80 in 2017 to N8.60 in 2018. Also, both pretax and post-tax margins were strengthened just as net assets per share grew by 2.57% – from N1.29 to N1.32 kobo – in 2018. Year on year, the bank’s return on equity, ROE, increased by 43.79% while return on assets, ROA, went up by 16.93% from 2017 to 2018.

Wema Bank also recorded marked improvement in its operations as gleaned from its trading numbers. There seems to be efficient allocation of resources and the deployment of qualitative strategies from the top to bottom. In 2018, Wema Bank converted 6.7% of its gross earnings to pretax profit. The conversion rate in the financial year 2017 was just 4.61%. Given a cost to income ratio guideline for 2019 at 75%-80%, it means the bank’s operations are expected to burn more cash.

From the declared results, more than 93% of the bank’s earnings were split between some fixed and variable overheard expenses. But then it was worse in 2017. The reasoning today then is that the outlook for 2019 is expected to be more upbeat if only the management consolidates on the relative feat it had achieved in 2018.

Significantly, the cost of obtaining funds by the bank declined in 2018. It cost Wema bank N53.17 on every N100 earned on interest income in 2018. This was as against the N62.76 kobo expended on every N100 that the bank had earned from its interest earnings assets in 2017.

Before now, and standing on three limiting factors of high costs, intense rivalry in the industry and weak asset quality, it had been a struggle for the likes of Wema Bank Plc to rise and thrive. The Central Bank of Nigeria, CBN is not also making things easy for small size banks as they are being regulated with as much intensity as their Tier 1 capital counterparts. Playing in the same market as their more endowed peers, but with far more limited resources, smaller sized banks have been finding it very difficult to wield the most desired leverage and influence in the market space.

Thanks however to the introduction of new technologies that has helped to raise the competitive capacities of innovative banks, whether big or small, room has now been further provided for leap-frogging. And Wema is seemingly enjoying this advantage with ALAT, a fully digitalized bank that is helping Wema to rise even higher.

Reviewing the big picture, an analyst told Business Hallmark that the CBN cash reserve ratio is putting pressure on banks as their funds are locked down. Within this scenario, small sized banks like Wema Bank Plc are seriously affected with the 22.5% cash reserve ratio requirement biting down very hard on them. The resultant effect is that it has grossly reduced the amount of loanable funds that are available to these banks.

Not excluded in this squeeze are many of the more endowed Tier1 banks who have also been complaining that the apex bank’s approach to CRR has indeed sterilized a significant chunk of their funds, thereby curtailing their ability to lend to customers and the broader market.

As a result of this situation, many banking sector players have taken up the alternative challenge of always going out there to source for more and more funds. In the tier 11 class where Wema Bank plays, maintaining strong capital buffer has indeed been an issue. A further threat that the sector would witness in 2019 is the implementation of the International Financial Reporting Standard 9. Broken down, the impact of the migration to this newly introduced reporting standard translates to an even greater need to raise fresh capital. On this score, it would be recalled that Wema bank had raised N17.675 billion in Tier II capital during the year 2018.

Still on the crucial issue of capital, Vetiva Research has noted in its banking sector update that average banking sector capital adequacy ratio (CAR) for the financial year 2018 was 17.05%, supported by a Tier I Banks’ average of 20.6% as against 16.6% for Tier II.

The firm said it foresees scope for additional capital injections in 2019 and 2020 to help absorb effects from the implementation of IFRS 9. That said, the need to raise additional Tier I capital is becoming increasingly crucial given the limitations of Tier II capital in CBN’s ratio of total qualifying capital.

The good news is that the management of Wema Bank Plc has already factored this into its planning mix. An insider told Business Hallmark that the bank is planning to raise fresh capital but several analysts have also noted that subordinated capital won’t do the magic. And all of this being played out even as Wema Bank stands between the tense state of rivalry in the industry and its struggle to rise.

Further on Wema’s 2018 results:

Wema Bank Plc’s numbers rested in the green corner overall in 2018, though some of the components moved over to hit red lines. But the power of the red ink in its business performance came largely on the back of weak asset quality. In the period, while all other banks booked lower impairment charges on credit losses, Wema Bank Plc recorded an increase.

Its audited statements showed that NPL hovered at 4.98% in 2018 as against the 5% benchmark set by the apex bank. Meanwhile, the industry ratio rested at 11.7%, having moved down from 14.8% in 2017. As Wema Bank Plc plans to book more loans in 2019, it therefore makes sense that the bank props up its NPL guideline to 5% for 2019.

A review of the bank’s income statement shows a net impairment loss on financial assets that closed the period at N3.51 billion as against N2.179 billion in the comparable period in 2017. This represents a more than 61% upsurge year on year. For it size, analysts say that this weakened the overall performance of the bank.

On the back of these, Wema bank paid its shareholders 3kobo per share as dividend for the first time in 14 years. At the earnings level, financial year 2018 operating performance improved generally. Its scorecard showed that Wema Bank Plc’s gross earnings expanded by about 10%, within the same period when some Tier 1 banks saw their own class market share nosedive. It has indeed been very long that Wema Bank last recorded this kind of beautiful performance. Says  a buy side analyst in a chat with Business Hallmark:

“The bank has strong fundamentals but is encumbered by competition. It is hard to believe that Wema bank came up with ALAT. Now they should finance it and the rest would be history. I think they have what it takes to compete only if they can carve out a niche for themselves.”

The increase in earnings power came on the back of an 8.6% uptick reported in interest income. This was supported by a 15.34% upswing in net fees and commission income. Net trading income rose by 15.28% while other income sources equally soared by a 16.10% margin.

From these figures, it means that the bank’s interest earnings assets generated about 9% more than they had in the previous year. In 2018, the bank made N57.634 billion on its interest earnings assets as income, compared with the N53.073 billion it had generated in 2017.

Most notably also, the amount expended on funding source or interest expenses declined by 8%. By interpretation, it means that the bank became more efficient in sourcing for funds and perhaps attracted low cost deposits. In figure terms, interest expenses paid on funds declined 8% year on year, from N33.306 billion to N30.642 billion in 2018.

On the contrary however, the amount booked as impairment surged. In 2018, net impairment loss on financial assets increased by more than 61% to N3.51 billion from N2.179 billion.

To worsen the case, net gain on fair value through profit and loss investment securities went down by 82.07%. The bank had recorded an N185.146 million gain in 2017, but by the end of 2018 only N33.188 million was added to its income statement.

To everyone’s relief, net fee and commission income, net trading income and other income came to the bank’s rescue with positive performances being recorded across the three lines. Broken down, net fees and commission rose to N6.507 billion in 2018 from N5.642 billion in the corresponding year in 2017, representing a 15.34% uptick.

As for net trading activities revenues, it also supported the income statement with N5.532 billion, up from the N4.799 billion it had attracted in 2017. This translates to a 15.28% increase between the periods. Other income similarly rose by 16.1%, from N1.569 billion to N1.821 billion.

Though the bank’s operating expenses were jerked up far above the average rate of inflation in the period, its pretax profit strengthened year on year. In 2018, personnel expenses expanded by 23.25% from N10 billion to N12.336 billion. Its depreciation and amortization expenses rose 13.14% to N2.622 billion while other operating expenses rose by 21.97% from N14.446 billion to N17.619 billion.

Wema Bank increased its balance sheet size in 2018 on the back of a 29.59% upsurge in total liabilities from N33.7.929 billion in 2017 to N437.915 billion in 2018. This was balanced with a 26.13% increase in total assets from N387.545 billion to N488.804 billion in 2018. The bank’s balance sheet reflected growth in loans and advances and customer deposits respectively.

Maintaining the momentum in the first quarter of 2019

Wema Bank Plc’s post tax profit closed the period with N1.144 billion as against the N764.701 million that was recorded in 2018. However, the review of the numbers show that Wema Bank Plc has paid more to obtain funds invested in interest earnings assets, albeit marginal.

On every N100 the bank made from interest earnings assets, N65.20 was paid to fund providers in the first quarter. In the comparable period in 2018, N65.70 was used on every N100 generated as interest income.

Between the periods, interest expenses rose by 26.21% on the back of an increase in business activities in relation to earnings assets. Interest income spiraled up to N16.078 billion compared with N12.644 billion made in the similar period in 2018. It is noted that net fees and commission remained flat in the first quarter of 2019, and that net trading income rose to N1.852 billion from N1.405 billion.

Earnings per share were also about double the amount made in 2018. The first quarter results showed that EPS closed at 12.4 kobo as against 6.8 kobo in 2018. Meanwhile, Wema Bank added about N100 billion to its total assets from the beginning of the financial year till the end of first quarter 2019.  Total assets increased to N583.867 billion from N488.804 billion at the beginning of the year. At the same time, shareholders’ funds increased marginally to N52.064 billion from N50.889 billion that had been the position at the beginning of the year.

A small move no doubt, but given the fast changing dynamics in the sector, any green move simply signposts that the affected player is still in the game. ‘Thank God for little mercies.’