Ray of Hope for Wema Bank

A 10.6% growth in profit for the half year ended June 2016 by Wema Bank is a pointer to improved returns for investors of the bank at the end of the year, writes Goddy Egene

Investors have started seeing the corporate results of listed companies for the half year (H1) ended June 30, 2016. The performances have been mixed. Given the economic headwinds, investors have been expecting moderate performance from companies for the H1. Apprehension among investors in banks is very high due to the policy tightening by the Central Bank of Nigeria (CBN) that has affected their earning capacity. Although some of them surpassed expectations in the first quarter (Q1), their H1 results are being awaited. Some have sent notifications for late filing of their results. However, Wema Bank Plc last week delighted investors, recording growths in performance indicators for H1.

Corporate summary
Wema, incorporated in 1945 as Agbonmagbe Bank Limited, is Nigeria’s longest surviving indigenous bank. The bank became a public limited liability company in 1987 and its shares were subsequently listed on the Nigeria Stock Exchange (NSE) in 1991. In 2009, the bank was classified among the distressed banks in Nigeria, given its negative capital position at that time. Subsequently, CBN replaced the bank’s management with an interim management team to oversee the recapitalisation of the bank.

In 2011, Wema downscaled its operation and opted for a regional banking license, in order to focus on its key market jurisdictions and strengths. The regional scope covered the South-West, South-South and
Abuja. In 2013, Wema’s capitalisation position improved after the successful completion of a private placement, which brought on board First Pension Custodian Nigeria Limited as the largest shareholder.

Having built the bank’s capital base well above the N25 billion regulatory minimum capital requirement for a national bank, Wema Bank applied for and was granted a national banking licence by CBN in November 2015.

Financial Performance
An analysis of the results showed gross earnings of N24.264 billion, which is an increase of 16 per cent above the N20.874 billion in the corresponding period of 2015. Interest income grew by 15.2 per cent from N17.497billion to N20.157billion, while net interest income fell from N9.0 billion to N8.5 billion. Wema Bank ended with an operating income of N12.69 billion, up by 3.4 per cent from N12.269 billion. Operating expenses recorded a marginal growth of 2.7 per cent, from N11.096 billion to N11.393 billion.

Consequently, profit before tax (PBT) stood at N1.297billion, a 10.6 per cent increase above the N1.173 billion in 2015.Profit after tax (PAT) grew by same margin, from N997 million to N1.103 billion.
However, a further analysis of the results indicated a drop in PAT margin, which declined from 4.78 per cent in 2015 to 4.55 per cent in 2016. Cost to income ratio improved from N90.4 per cent to 89.78 per cent in 2016, while loan to deposit ratio rose to 61.9 per cent from 56.7 per cent. Return on average asset improved from 0.29 per cent to 0.30 per cent, while return on average equity declined from 2.28 per cent to 2.40 per cent.

Managing Director’s explanation
Commenting on the performance, the Managing Director/Chief Executive Officer of Wema Bank, Mr. Segun Oloketuyi, said in spite of these challenges, the bank has been able to deliver a modest improvement in the first half of the year. According to him, interest income grew by 15.2 per cent from N17.5billion in H1 2015 to N20.2 billion in the current period, while fee and commission income improved significantly by 42.3 per cent from N2.2 billion in H1 2015 to N3.1 billion in H1 2016.

“This growth in non-interest revenues was driven by our ongoing initiative to enlarge our footprint in the retail space while keeping customers at the heart of our operations. We believe that this is where we will continue to win in the marketplace. We continued to closely monitor our costs as we optimize our operations.

Operating expenses grew from N11.1 billion in H1 2015 to N11.4 billion at a rate of 2.7 per cent, lower than year-to-date inflation rate of 13.26 per cent. We achieved this through the continued migration of customers to alternative channels and deliberate efforts at reducing our cost to serve. These efforts are reflected in our PBT growing by 11 per cent to N1.3 billion from N1.2 billion in H1 2015,” Oloketuyi said.

The CEO said while the bank has increased its loan to deposit ratio from 65.1 per cent in December 2015 to 67.5 per cent as at June 2016, its emphasis on selective risk creation ensured its non-performing loans (NPL) ratio is kept below three per cent, which is significantly lower than the industry average.

He said:” We expect that this risk underwriting discipline should continue to serve as a foundation for us to deliver consistent satisfactory results to our stakeholders in the second half of the year. We are also delighted by the affirmation of our current investment grade rating by Fitch rating agency; a ratification of the sustained performance over the last few years. We commence the second half of the year with a sense of cautious optimism; well aware that the economic fundamentals point to an economy heading for further slowdown, yet hopeful that additional fiscal initiatives will be implemented to stimulate growth. We are awaiting final regulatory approvals for our debt capital raise and we expect to conclude the process this quarter.”

Oloketuyi explained that the bank is continuously being transformed, stressing that “while we are pleased with the current results, we are aware of the tough task ahead. We remain committed to all our stakeholders in delivering value across board. The focus on growing our retail base and engaging our customers through mobile and alternative platforms should yield benefits to the bottom-line as we also continue to monitor and manage our risk portfolio and asset quality.”

Regaining National Bank Status
After operating as a regional bank for about five years, Wema Bank last November got back its national banking licence from CBN. Oloketuyi said the decision to scale down operations in 2010 and operate as a regional bank was a deliberate interim measure to reposition the bank for better performance.

“The resultant shrinkage in the geographic space of operations enabled us to focus business development on our areas of strength as a repositioning strategy in the short term. We were also able to wind down operations in locations where the bank did not have viable business. Having stabilised the bank through improved processes, systems and people, we are well positioned to replicate our new and tested service delivery model in other locations outside our current geographic space,” he said.

The Oloketuyi explained that Wema Bank has become a stronger, more efficient, resilient and customer-focused organization with a robust risk and governance structures in place to support its growth plan.

“The bank has realigned its business focus to concentrate on its key area of strength, which is retail banking. We have used technology to our advantage, deploying in-branch solutions, mobile and internet applications and other social media tools to drive customer patronage and to reduce our cost to serve. We have continued to contain our operating expenses and at the same time reporting significant improvement in our fee-based income lines,” he said.

Fitch Rating
Fitch, a global leader in credit ratings and research, recently affirmed Wema Bank’s Long-term National Rating at BBB-.
Fitch, in its rating, said Wema Bank’s strengths, which underpin its long- and short-term ratings, include its strong risk management culture, low non-performing loan (NPL) exposure and good liquidity levels.

“The bank’s affirmed rating further reinforces its resolve to remain a smarter and efficient Bank. The Long-term Issuer Default Ratings (IDR) of Wema remains on Stable Outlook as the rating is driven by its Viability Ratings (VR) and there is no expectation of any material change in the bank’s intrinsic creditworthiness,” Fitch said.
In Fitch’s opinion, the banking industry in Nigeria will remain challenging considering volatile and low oil prices, continued disruptions in oil production and constraints regarding the foreign exchange liquidity.